Will the U.S. economic recovery last?

By Money Matters Editors

After a year of negative GDP growth, U.S. GDP growth finally returned, registering a better-than-expected 3.5 percent growth rate in Q3.

Doesn’t it seem like it’s been years since economists and analysts have talked about GDP growth? That’s because the recession actually started in December 2007 – with only a modest level of growth occurring during Q4 2007. In other words, the United States registered five consecutive quarters of sub-par growth or  negative growth: that is a long time. In fact, the U.S. economy registered four straight negative growth quarters during the recession – the first time that’s occurred since the Great Depression.

Further, in the past 12 months, the economy has contracted 2.3 percent, including a 0.7 percent contraction in Q2 and a 6.4 percent plunge in Q1.

The rebound in Q3 was broad-based: government spending (including the $786 billion fiscal stimulus package), a slowdown in the reduction in business inventories, an increase in residential investment, and higher consumer spending, all contributed to the 3.5 percent gain.

Recession is not over, yet

However, don’t confuse the one-quarter GDP gain with the end of the recession. Technically, the Q3 gain in GDP does not mean the recession is over. The economy is recovering, but the National Bureau of Economic Research is the widely-accepted determiner of the economic cycle. One historical measure of the end of the recession that the NBER has used: two consecutive, positive GDP quarters.

Still, what one can say is that the U.S. economy is attempting to form a bottom. The obvious question, then, for investors is ‘where do we go from here?’

Some economists, the economic pessimists, argue that the U.S. economy will bounce-along-the-bottom, i.e. register anemic growth, or even possibly fall into a double-dip recession. These economists argue that the fiscal stimulus represents just a temporary, short-term boost to the economy, and that the factors are not in place to sustain the recovery. The U.S.'s high 9.8 percent unemployment rate will also cap demand, leading to economic stagnation.

Other economists, the optimists, argue that given the unusually large reduction in business inventories, pent-up demand in the economy (for autos, for example), an increase in exports supported by the weaker dollar, and the remaining stimulus money – most of the fiscal stimulus package still has not been spent - point to an economic recovery that will gain momentum in the quarters ahead.

Money Matters Editors tends to side with the optimists. There is reason for cautious optimism, assuming oil prices do not return to the stratosphere. If, however, already historically high $80 per barrel oil rises to $100-120, that has the potential to slow GDP growth dramatically by increasing business costs, and by eliminating consumer disposable income; sky-high oil prices will also increase inflation.

But barring another oil shock, look for the U.S. economic recovery to gain steam in the quarters ahead. However, most likely, GDP growth will not be robust. It should, however, be strong enough to end monthly job losses by mid-2010, with the economy adding jobs by Q3 2010. Sustained job growth however, will require the appearance of new sectors – new engines of growth for the U.S. economy.

The above doesn’t sound like much, but given that the U.S. and global financial systems were close to the abyss about a year ago, it’s a significant accomplishment.

Further, the sectors likely to perform well in the year ahead include technology, consumer staples,  infrastructure / emerging market plays, and commodity-based plays, and in the weeks ahead Money Matters Editors will review some star performers.