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The latest estimates indicate that gross domestic product, one of our primary roughlly coincident indicators, grew at a seasonally adjusted rate of 2.8 percent in the third quarter.
Although this expansion in GDP after four quarters of decrease appears to be a positive development, continued growth may not be sustainable. The reason for this is that government spending, rather than consumer spending and private investment, is fueling current growth.
Investment in housing and personal consumption increased in the third quarter. Both were driven by government programs – new tax credits for home buyers and Cash for Clunkers.
The December 2009 edition of Business-Cycle Conditions analyzes the GDP numbers in detail (to read this article, visit the archive or purchase it separately).
The government cannot continue to inject billions of dollars into the economy indefinitely. Consumption and private investment needs to increase to create healthy growth. With key coincident indicators such as nonagricultural employment and personal income clearly contracting, the economy remains fundamentally weak.
Two of the six coincident indicators are now expanding, for a score of 33. The cyclical score of coinciders, based on a separate, purely mathematical analysis rose to 35 from 19. A score above 50 for both these measures indicates an expansion is more likely than further contraction.
The percentage of primary lagging indicators expanding fell to zero this month. Usually, these indicators turn upward after the business cycle turns upward. Until we see expansion in the laggers, we cannot assert that a recovery is underway.
The primary leading indicators suggest that overall economic activity continues to rise. This month, nine out of the 12 leaders are appraised as expanding for a score of 82, up from 78 last month. The cyclical score of the leaders increased to 57 from 54.
But given the primary driver of current economic growth—government spending —the recovery is lining up to be tenuous or at the very least, unbalanced.
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This article is from the December 3, 2009 issue of Research Reports.
Members: To read the rest of this article, please visit the archive. You can find the password for the archive in the latest AIER Online email.
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