GDP Growing Again: Are We Finally Okay?

So GDP grew at 3.5% in the third quarter?  Are we out of the woods yet?

Maybe.  But I wouldn't bet on it.

I think we have bottomed out; I don't foresee the economy starting to contract sharply again.  But I'm not overimpressed by the growth figures, for a couple of reasons.  First, we had a very sharp contraction, and as the traders like to say, even a dead cat will bounce if you drop it from a sufficiently large height.  Second, there's the stimulus.

When we were considering the stimulus, I got asked frequently whether it would work.  That very much depends on what you mean by "work".  If the question is: "can I increase the size of a measured variable by boosting one of the components of that variable," then the answer is undoubtedly "yes"--but this is trivial.  We borrowed a bunch of money from abroad, and that was going to show up as an increase in GDP.  But as I wrote in our November issue, GDP is at best a proxy for our well-being, not a direct measure of it.  It's often a good proxy.  But it's never perfect, and it's very easy to manipulate with certain sorts of government actions, most notably borrowing a ton of money from the global capital markets.

The things I think we really want to know about the economy are:

1)  Is it robust enough to withstand the large sectoral shifts away from housing and related goods?

2)  Are employment and compensation growing?

3)  Is productive capacity improving?

4)  Are people willing to invest in the future?

The answers to those questions range from "no" to a wan "I sure hope so".  So the third quarter growth numbers bring me only middling cheer.

This article available online at:

http://www.theatlantic.com/business/archive/2009/10/gdp-growing-again-are-we-finally-okay/29319/