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The US economy now appears to have grown at its strongest rate in 2 years during Q-3, rebounding from a steep downturn that began in December 2007, according to survey of top economists released Saturday. Private economists polled October 5-6 for the Blue Chip Economic Indicators October survey said gross domestic product grew at an annualized rate of 3.2% in the Q, up 0.2 percentage point from what they estimated a month earlier. GDP shrank in Q-2 at a 0.7% annual rate. Q-3 growth was fired by a rebound in personal consumption expenditures, the first increase in residential investment since the final quarter of 2005, and a reduced rate of business inventory reduction, the survey said. Read more

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The sharp decline in the US economy is ending and recovery will come about slowly according to a report released by the International Monetary Fund (IMF) yesterday.

In an annual report on the world’s largest economy, IMF stuck to its earlier forecasts that the US GDP will contract by 2.6% in 2009 and then rise by 0.8% in 2010.

Due to the large monetary and fiscal stimulus and wide range of measures to restore the financial stability, “the sharp fall in economic output seems to be ending, and confidence in financial stability has strengthened,” the IMF said in its report after the Article IV annual consultation with US officials. However, “financial strains are still elevated and the outlook remains for only a gradual recovery, with risks still tilted to the downside,” it said.

Also on Friday, the US Commerce Department reported that the US economy fell at a more subdued 1.0% pace in the Y 2009 Q-2, a strong signal that the worst recession since the Great Depression has eased, and is coming to a close.

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US President Barack Obama said last week that the recession-hit US economy was showing “glimmers of hope” despite remaining under strain and promised further steps in coming weeks to tackle the financial crisis. “We’ve still got a lot of work to do,” Obama told reporters after a meeting with economic and regulatory teams plus Federal Reserve Board Chairman Ben Bernanke. But he added, “We’re starting to see progress.” Obama spoke a day after encouraging trade and jobless figures pushed stocks higher, and White House economic adviser Lawrence Summers predicted the economy would emerge from a sense of “freefall” by the middle of the year.

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The U.S. economy shrank in the Y 2008 Q-4 at its fastest rate since 1982 after a massive decline in inventories held by companies, according to official figures released on Friday.

Economists said that given bleak near-term prospects for consumption and investment, the US faced its worst economic downturn since the second world war, with even the US$787B stimulus plan signed by President Barack Obama earlier this month promising little immediate relief. “Finally the GDP data have caught up to the severity of the recession and, unfortunately, we expect the first quarter report to show similar weakness to the fourth quarter,” wrote an economist.

Updated data showed US gross domestic product contracting at an annualized rate of 6.2% in Y 2008 Q-4, below both the first estimate of a 3.8% c fall and economists’ predictions of a revision to a 5.4% decline. The biggest reason for the contraction was a revision to inventories, which are estimated to have fallen by US$19.9B rather than up by US $6.2B, shaving 1.1% points off the final figure.

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The United States and Europe have committed a lot of money to rescuing ailing banks to date. Japan’s veterans have just two words of advice: More and Faster.

The Japanese have experience as they endured a decade of economic stagnation in the 1990’s, because their banks struggled under crippling debt, and successive governments wasted trillions of yen on half measures to restore them.

In 2003 the Japanese government finally took actions that led to a recovery: forcing major banks to submit to merciless audits and declare their bad debts; spending two trillion yen, or US$22.23B at today’s rates. Thus effectively nationalizing a major bank at the expense of shareholders; and allowing weaker banks to fail.

But by the time that went into effect the Nikkei 225 stock index dropped by about 75% from its highs. Prices for real estate ultimately fell for 15 consecutive years, and public debt grew to exceed gross domestic product as deflation took hold. Some scholars of the Japanese debacle see the USA heading to a similar fate.

“I thought America had studied Japan’s failures,” said Hirofumi Gomi, a top official at the Japanese Financial Services Agency during the crisis. “Why is it making the same mistakes?”
Some US critics of the plan announced last week by US Treasury Secretary Timothy Geithner said it lacked details. Experts on Japan found it timid at best, especially given the size of the banking crisis the Obama administration faces.

“I think they know how big it is, but they don’t want to say how big it is,” said John Makin, an economist at the American Enterprise Institute, referring to administration officials. “It’s so big they can’t acknowledge it.”He added: “The lesson from Japan in the 1990s was that they should have stepped up and nationalized the banks.”

Instead, the Japanese first tried many of the same remedies that the administration of President George W. Bush tried and the administration of President Barack Obama is trying, i.e., low interest rates, fiscal stimulus and ineffective cash infusions, among other things.
The Japanese also tried to tap private capital to buy some of the bad assets from banks, as Geithner proposed.

One of the reasons Japan was so timid was fear of public outrage, which grew with each act of the bailout, but the Japanese experience shows that resolving the mess will require a firm government hand and will be extremely expensive. Delay in doing it now will only cause the cost to soar, and the bank rescue will determine the fate of the wider US economy. While President Obama has prioritized his stimulus plan, no stimulus is likely to succeed unless the banking sector is repaired, and the United States probably will not be able to count on a growing demand for its products as the global economy worsens. A further lesson is that the bank rescue will determine the fate of the wider economy. While Obama has prioritized his stimulus plan, no stimulus is likely to succeed unless the banking sector is repaired.

“The way things are going right now the U.S. taxpayers’ burden will keep going up and up.” said Takeo Hoshi, an economics professor at the University of California at San Diego.

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President-elect Barack Obama recently stated that his stimulus proposal could save or create as many as 4 MM US jobs by 2010, nearly 90% of them in the private sector. Obama previously estimated that his estimated US$800B strategy to pull the US economy out of its year-long recession could save or create 3 MM jobs, but his new study has found that the actual number would range between 3 million and 4 million. The analysis was submitted by Christina Romer, head of Obama’s council of economic advisors, and Jared Bernstein, the economic adviser to Vice President-elect Joe Biden. The analysis directly follows an official government report showing that US employers slashed more than 500K jobs in December 2008, pushing the US unemployment rate to 7.2% and bringing the number of jobs lost in the US last year to 2.6MM, the worst since 1945. “The jobs we create will be in businesses large and small across a wide range of industries,” President-elect Obama said on his weekly radio and Internet address. “And they’ll be the kind of jobs that don’t just put people to work in the short term, but position our economy to lead the world in the long term.”

Federal Reserve Chairman Ben Bernanke said that the stimulus package being crafted by President-elect Barack Obama and Congress could provide a “significant boost” to the sinking economy. But he warned that such a recovery won’t last unless other steps are taken to stabilize the shaky financial system.

Although Bernanke has previously endorsed the notion for a fresh round of government stimulus to lift the country out of a recession, it marked the first time the Fed chief has referenced the roughly US$800B recovery plan now being worked on by Obama, who takes office next week. Obama envisions a blend of tax cuts and increased government spending, including on big public works projects, to make up the stimulus plan.

Bernanke, who didn’t weigh in on the details of the evolving package, made clear that such a recovery plan was needed as part of a broader, multi-pronged government response to combat the worst financial crisis to hit the U.S. and the global economy since the 1930s.

The world view: President-elect Barack Obama has unveiled his recovery plan for the US Economy as if the policies of the rest of the world had no bearing on the fate of the US. His POV is that a large US fiscal stimulus policy will be enough to restore prosperity. The world’s economy needs more that a US stimulus, as the problems are much deeper and global than the US alone.

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