About the "Blip"

[ProSense]

GDP growth of 5.7% ----> JOBS!

by New Deal democrat

The advanced estimate of 4th Quarter 2009 GDP has just been released, indicating that the economy grew at a rate of 5.7% in the last three months of last year. While 3.4%of that was related to the restocking of very lean inventories (meaning 2.3% was not, which ain't bad), it is well to remember that, regardless of the source of GDP growth, whenever YoY GDP growth has been in excess of a little more than 2% a year, it has always indicated job growth. In the year 2009, the initial estimate is that economy grew at a rate of 0.8%. I’ll show you the very tight correlation between GDP growth and job growth below, as well as why it is very likely that this quarter - the first three months of 2010 - the economy is growing at a rate in excess of 2%.

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About the "Blip"

Both Prof. Paul Krugman and Calculated Risk have called the good GDP reading a "blip" that can be attributed to inventory restocking. The implication for the blogosphere being, of course, that it will momentarily pass and we will be back in negative GDP pronto, even though that is not what either are saying. Krugman thinks the odds against. a double-dip are 60%- 70%. CR sees 1% to 2% growth. As indicated above, Q4 2009 GDP grew at 2.3% even without restocking. Their template is the temporary bounce following the 1980 recession which promptly resolved into the very deep 1981-1982 recession.

While GDP is likely to subside, the double-dip after the 1980 recession has a very simple and straightforward explanation: Paul Volker of the Fed raised the Federal Funds rate from 9% ti 19% in 6 months, effectively killing the economy and employment in order to kill inflation. Here's two graphs showing it. In the first, the Fed Funds rate is in blue, and the GDP in red:

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The graph shows Krugman's exemplar "blip." Notice that there were several quarters of actual job growth afterward. Compare this with what happened after 1982 -- there is a full year of +7.5% GDP growth from early 1983 to early 1984, that slowly tails off thereafter. Contrast this with the lackluster GDP growth of under 3% in the first 3 or more quarters after the end of the 1991 and 2001 recessions.

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