Aug. 19 — The Institute of Supply Management survey and the Federal Reserve System's index of industrial production point toward considerably greater productivity in coming months. As such, investment banks began issuing revised gross domestic product (GDP) estimates for the second half of 2009, most commonly ranging from 1.8 percent to 3 percent. This data, plus a much improved, albeit dismal, employment report has led many to conclude that the worst is over. However, when assessing the potential for sustained economic growth in 2010 (the likely inflection point for natural gas supply/demand tightening), the forecasts are varied and typically not as rosy as the second half of 2009.
The basic thought is that manufacturing cannot carry an economic recovery on its own. Consumer spending accounts for almost 70 percent of GDP. And while improvements in manufacturing may kick-start spending and employment, it would require employers to rehire at a very quick pace to avoid a slow and staggered increase in consumer spending. Some of the spending headwinds include:
4Many of the unemployed are nearing exhaustion of benefits and extended benefits.
>With huge deficits and President George W. Bush's tax cuts expiring, tax relief has likely been exhausted.
>Savings rates typically increase during the first years of a recovery. With the drop in net worth, increases in the savings rate will likely continue.
>While inflation will likely be relatively mild, disinflation has probably run its course and will no longer benefit consumers.
Determining the pace and sustainability of a long-term recovery will be the on-going focus. As a point of reference, recessions in 2001 and 1990-'91 were slow to return employment; job cuts were experienced throughout the recovery phase. However, there are two major differences between those recessions and the current situation. In the current recession, 2.9 percent of service sector jobs (3.3 million) have been lost, compared to a .5 percent loss in 2001 and 1990-'91. The other difference is that the current recession has seen GDP fall 3.9 percent since the peak in 2008. That is the steepest decline since World War II and much deeper than the relatively shallow reductions in output experienced in the last two recessions. We don't really know what a modern recovery from such a steep drop looks like. Some see a massive jump in GDP, while others see a below trend growth pattern in 2010 dogged by consumer spending.
Brad Smith, price risk manager, can be contacted at
bsmith@usenergyservices.com.