This is part two of a two-part feature on today’s revised GDP numbers. Click here to access Part 1.
Natural Gas Could Lessen Our Oil Reliance
However, if we can start to replace imported oil with domestically-produced energy we could substantially boost the overall rate of economic growth. While ultimately we would want to do that with renewable sources, such as wind and solar, they mostly produce electricity, and oil is mostly used as a transportation fuel. We do, however, have very abundant supplies of natural gas, and the technology for using natural gas as a transportation fuel is already very well established.
We need to take steps NOW to transition to the use of more natural gas as a transportation fuel to replace oil. Ethanol really is not that good of an answer since the production of corn to be made into ethanol for fuel requires using a lot of oil. However if we can move to ethanol made from things like saw grass, or the corn stalks that are left over from the corn harvests, that would be a major step forward. Bio-fuels based on algae are also another promising area.
Beheading “King Dollar”
A weaker dollar would help significantly on the other half of the trade deficit, the part that is made up of all the stuff lining the shelves at Wal-Mart (WMT). King Dollar is a tyrant and needs to be deposed. It will help on reducing imports as foreign goods become relatively more expensive and producers fill demand from domestic production. That does not happen overnight, however.
The trade deficit is a far bigger economic problem than is the budget deficit, particularly over the short and intermediate term. The fact that we are making significant progress in bringing it down is extremely welcome news.
Downward Revision Disappointing
The downward revision to growth is clearly a disappointment; the consensus had been looking for a slight upward revision. The quality of growth is still high, but it is not like the downward revision all came from the low-quality inventory change area. None of it did. The shaving of growth was widespread, and not particularly focused on any part of the economy.
The biggest downward revisions came from the Consumer, most notably in Services, and from State and Local Governments. Net exports were also somewhat less positive than we thought, entirely due to higher imports. I suspect that most of those higher imports were from the oil side.
Ironically, most of the improvement in the Durable goods part of PCE came from more spending on motor vehicles. The rebound in vehicle sales has been much stronger in the gas-guzzling pick-up trucks and SUVs than it has been in fuel efficient cars. How soon we forget about gas prices as soon as they drop.
Even though net exports added to growth, it is the change in net exports that causes a change in GDP, not the level. We are still running a very big trade deficit, and as a result, net exports are still an overall drag on the economy. The only way we will cure this cancer that is eating away at the economy is to cure our addiction to foreign oil.
Yes a weaker dollar will help, but it can’t do the job on its own, as it is ineffective against more than half of the overall trade deficit. Aggressive steps to switch to natural gas and electric powered vehicles would go a long way to improve the overall health of the economy, not to mention the over all health of the people in the economy through better air quality. Cutting funds for research into alternative energy is extremely shortsighted. It not only slows growth now, as the vast majority of spending cuts will do, but is likely to result in slower growth over the long term as well.
Still, It’s Growth
Growing at 2.8% (3.2%) is not all bad, especially when the quality of growth is very high, and considering that Residential Investment is still missing in action. It is higher than the average growth between the second quarter of 2001 (when Bush took office) through the fourth quarter of 2007 (when the Great Recession started), of 2.4%. If the entire Bush Presidency is considered, (1Q01 to 4Q08) growth averaged just 1.8%. So far growth has averaged just 1.4% under Obama.
Of course, the economy was in a far worse condition when Obama took office than when Bush took office. Obama’s economic policies could not really have had much of an effect on growth in the first quarter of 2009, as the ARRA was not even passed until the quarter was 2/3 over, and he did not even take office until it was almost 1/3 over. If the first quarter of the presidential term is ascribed to the president leaving office, then the average growth under Obama rises to 2.3% and that of Bush falls to just 1.6%.
While the House seems determined to cut spending in the near term, they are doing their best to make the real problem, the long-term structural deficits, worse not better. The non-partisan CBO has estimated that the Health Care reform will save nearly $1 Trillion over the next decade, so repealing it would add significantly to the long-term structural deficit.
The Bush tax cuts are at the heart of the structural deficits. Neither side wants to repeal all of them, but doing so would cut the deficits by $3.7 Trillion over the course of the next decade. That is almost as much as all of the changes suggested by either of the two recent deficit commissions. Repealing the top end of them would put a smaller, but still significant $700 billion dent in the structural deficit (over a decade).
Cutting spending too fast is likely to be counterproductive, just as it has proven to be in the U.K., which recently announced that its economy shrank by 0.5% in the fourth quarter. Granted, they had some crappy weather, but then again so did we in the fourth quarter. The drag from State and Local government spending is likely to accelerate it in the first quarter, and we do not need to compound that with a major drag from Federal government spending. Having the overall government being a non-factor at this stage of the economic cycle is probably about where we want to be.
Disappointing, but Laced with Some Hope
Overall, a disappointing report, but one that still lays the foundation for more growth ahead. This is not the sort of growth that will lead to substantial increases in employment. Jobs, not inflation, or even the budget deficit, are still the most pressing problem for the economy. Yes, we have to tackle the long-term structural deficit, but that is a different issue than the near-term cyclical deficit.
I would argue that the current debate over how much to cut right away is completely off-base. The spending cuts will slow the economy, meaning fewer jobs, and as a result lower tax revenues. I don’t mean that the spending entirely pays for itself — only partially so. But the net result is that the spending cuts being discussed will lead to a far lower impact on deficit reduction than is advertised.
Incidentally, the same thing is true with tax cuts. They do help stimulate the economy, but aside from a few special cases, they do not pay for themselves. Some tax cuts are more stimulative than others, just as some spending is more stimulative to the economy than other tax cuts.
The cut to the payroll tax is an example of a highly simulative tax cut. The high-end Bush tax cuts are an example of a very ineffective tax cut from the point of view of stimulating the economy. Unfortunately, in the recent tax deal, we had to continue the high-end of the Bush tax cuts to get the payroll tax cuts. The beneficial impact of the payroll tax cuts now looks like it might be offset by spending cuts that slowdown the economy and result in unemployment coming down slower than it otherwise would.
This is part two of a two-part feature on today’s revised GDP numbers. Click here to access Part 1.
WAL-MART STORES (WMT): Free Stock Analysis Report
Zacks Investment Research
