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GDP Trends Not Encouraging

Expect little or no change in GDP growth in the government's revised estimate scheduled for Friday. Looking ahead, however, there's reason for concern.

The Commerce Department plans to issue on Friday a revised estimate for fourth-quarter GDP growth. The advance fourth-quarter estimate issued in January was for a 5.7% annual pace of growth, and the consensus among forecasters is for no change in the revision.

My estimate is 5.6%, owing to some revisions in the export and import statistics.

Fourth-quarter GDP growth was pumped up by a slower place of inventory drawdown. In the arcane world of GDP accounting, a slower pace of depletion adds to growth.

Demand for U.S.-made goods and services -- the key to sustainable growth -- added only 2.3% to growth. Domestic demand -- less a bump in net exports that is not likely to be sustained -- added only 1.8%.

Looking ahead, data are not encouraging.

A bullwhip effect on inventories will add to first-quarter growth, as businesses restock a different selection of goods and services for a scaled-back consumer. However, retail sales indicate sustainable domestic demand is growing slowly, perhaps at an inflation-adjusted rate of 2%.

Auto demand has recovered, pushing up production, but further increases are unlikely.

New-home sales and starts have been trailing down over the last six months, commercial construction remains very weak and businesses are not investing a lot other than in technology goods and software. Outside the auto patch and high-tech manufacturing, soundings from suppliers in the construction trade and small manufacturers are simply not encouraging, outside the auto patch and high-tech manufacturing.

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Weekly jobless claims remain greater than 450,000 (350,000 is considered healthy). Manufacturing is showing some ginger, thanks to stronger car production and leaner methods in technology-intensive industries. However, new-car sales are not strong enough to drive further expansion of production, and auto factories appear able to make do with existing workers, while other industries are getting by with even fewer workers. These days it takes a lot of new demand to cause anyone to hire.

Uncertainty about President Obama's health care and tax plans is causing great unease, as is Treasury Secretary Timothy Geithner's failure to address the weakness among the nation's 8,000 regional banks and the adverse effects of China currency peg and the resulting U.S. trade deficit. Fear is gripping many smaller businesses, belying indicators that report the sentiments of larger firms and multinationals.

Overall, significant and substantial improvements in two areas -- trade and bank performance -- are needed but do not appear to be forthcoming.

Businesses need customers and capital, and without an improvement in the trade deficit, they won't have more customers. The regional banks have too many troubles to make many new loans. Geithner does not seem focused on these issues or effective where he is focused (for example, on China's repudiation of meaningful revaluation of the yuan and congressional rejection of the Volcker rule).

Most of second-half GDP growth that was not attributable to the inventory adjustment went to bank bonuses. Those profits were earned with inexpensive

Federal Reserve

credit and represented financial churning more than real growth.

Professor Peter Morici, of the Robert H. Smith School of Business at the University of Maryland, is a recognized expert on economic policy and international economics. Prior to joining the university, he served as director of the Office of Economics at the U.S. International Trade Commission. He is the author of 18 books and monographs and has published widely in leading public policy and business journals, including the Harvard Business Review and Foreign Policy. Morici has lectured and offered executive programs at more than 100 institutions, including Columbia University, the Harvard Business School and Oxford University. His views are frequently featured on CNN, CBS, BBC, FOX, ABC, CNBC, NPR, NPB and national broadcast networks around the world.