-- John Kemp is a Reuters columnist. The views expressed are his own --
By John Kemp
LONDON, Nov 2 (Reuters) - Contrary to expectations, the return to growth in the United States during Q3 was driven by a sharp improvement in final sales rather than rebuilding inventories along the supply chain.
The Commerce Department's advance estimates, released last week, show gross domestic product (GDP) rising 0.9 percent between Q2 and Q3. Final sales contributed most of the increase, rising 0.6 percent compared with the previous three months. Inventory changes added only another 0.2 percentage points. * http://graphics.thomsonreuters.com/ce-insight/US-GDP-ESTIMATES.pdf
The data is in line with experience after previous recessions [ID:nL8587093]. The return to growth after a "severe recession" (defined as two consecutive quarters of shrinking final demand) is usually driven, in its early stages, by a resumption of final demand rather than inventories. In contrast, growth after a milder, "inventory-driven" recession (defined as two quarters of negative growth in GDP, but not final demand) depends more heavily on inventory rebuilding.
There have been five severe recessions since the end of World War Two (1953-54, 1974, 1982, 1990-91 and now 2008-2009). The rebound in final demand during Q3 2009 is about average for the first quarter after a severe recession ends. Final demand growth has ranged from as little as 0.4 percent to as much as 1.5 percent. The current, anaemic recovery (0.6 percent) is therefore fairly normal.
* http://graphics.thomsonreuters.com/ce-insight/DOING-THE-INVENTORY-SWING.pdf
Looking forward, the data paint a mixed picture. On the positive side, reliance on final demand rather than inventory changes suggests the recovery should be sustained and is unlikely to peter out when restocking is complete. In fact, much of the restocking has probably yet to take place, and could provide a further impetus to growth in Q4 2009 or Q1 2010.
But on the negative side, the base of the recovery is dangerously narrow. Much of the improvement in final sales came from just two sectors: stronger spending on motor vehicles and federal government spending, much of it on defence programmes. Final sales of items other than autos and defence equipment rose just 0.3 percent in Q3, half the overall rate.
Spending on autos was likely driven by the "cash for clunkers" programme and may be difficult to replicate now funding has run out. Spending on defence cannot continue rising at the same rate, though it is possible more non-defence expenditures authorised by the stimulus bill will be disbursed in the coming quarters, helping take up some of the slack.
Overall, the current recovery appears fairly typical. Despite the doom-laden warnings, it does not appear to be weaker than usual. Growth may remain subdued for the next couple of quarters, as the initial impetus from the cyclical turning point and the cash for clunkers programme fades and before stronger investment and inventory building kick in.
The unusual seasonal strength in container freight movements on U.S. railroads suggests continued recovery in manufacturing activity and/or imports is cancelling out the normal seasonal slowdown at this time of year. Increases in the number of railcars moving motor vehicles and parts, as well as metals and metal-products, also point to a steady, albeit slow, upturn. * http://graphics.thomsonreuters.com/ce-insight/CONTAINERS.pdf * http://graphics.thomsonreuters.com/ce-insight/US-RAIL-MVP.pdf * http://graphics.thomsonreuters.com/ce-insight/US-METALS-MVP.pdf
Recovery in the job market will be delayed. But rehiring is always slow after a recession ends. Those warning about a "jobless recovery" clearly do not remember earlier jobless recoveries after the 1990-91 and 2000-2001 recessions.
Unemployment, consumer debt and stagnant household incomes will act as a headwind restraining the expansion, but there is little likelihood that they will halt the recovery altogether. While the data flow will remain mixed, the outlook is for a fitful and patchy resumption of growth over the next 6-9 months, and a gradual pick up in commodity demand. (Editing by Toby Chopra)