Economic Analysis*

Measured yr/yr, real GDP increased by about 3.3% through Q2 '10.
Given that this 12 month period represents a full year of recovery,
this is a disappointing result. Partly, it reflects slower than expected
rebuilding of inventories in the wake of enormous inventory
liquidation during the recession. My coincident indicators -- real
wage change, total civilian employment, real retail sales and
industrial production -- were up 3.1% on a combined basis. One
factor that jumps out in looking at these indicators is how deeply
employment fell and also how the change in employment remains
negative still on a yr/yr basis. Safety net and stimulus programs
notwithstanding, the weak recovery of employment to date does
represent a serious loss of purchasing power in the economy.
The coincident indicators do not account for consumer savings
preference or for credit use. Consumers are rebuilding savings and
so far, credit use has been declining in the aggregate. So, collectively,
consumption has been on a cash and carry basis with occasional
dollops of funds squirreled into savings.

Real GDP when measured yr/yr should really be up between 5-6%
in the early stage of recovery and the shortfalls in consumer spending
and inventory re-investment are important factors behind the
lag in expected performance.

Long term, I peg real GDP growth potential for the US at 2.8% per
year. That is below the historic rate and reflects reduced
assumptions concerning labor force growth and labor participation
rates. It is far too early to reduce growth potential further, but it
is fair to acknowledge that the fist full year of recovery was a
disappointment. I can understand the fear and caution this
recession has created, particularly since it hit the work force,
household wealth, and the banking system so hard. For now, I am
trusting that continued recovery, however moderate, will allow
all major sectors to loosen up and behave with more confidence.
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* I have many reservations about using GDP data, not the least
of which are the political ends it is used to serve. So I'll probably
only touch on it once a year or so.