Wednesday, February 03, 2010

A recovery borne on gossamer wings 

I was reading John Taylor this morning and needed a free 20 minutes to redraw the first graph he has. He is trying to make the point that there has been no effect of the stimulus, by first showing (in an earlier post) that increased tax rebates and transfer payments were not stimulating consumption. In yesterday's piece, he adds that "changes in government purchases have had virtually no effect. The turn-around in growth has been mainly due to private investment." But I looked at his graph and it has total private investment. Much of that increase has come from inventories. How much? I've redrawn his graph dividing his investment figure between fixed investment (including residential investment) and inventories. The green line is inventories and the red line is fixed investment.

Inventories were responsible for $105.7 billion of the $182 billion change in GDP in quarter 4. This is just another way of saying pay attention to final sales of domestic product instead, which was up 2.2%. Up, yes. Up more than the previous quarter, yes. But again it needs to reach a more sustainable level.

As to Prof. Taylor's earlier point, worth noting that personal income less transfer payments has fallen by 4.1%. As many people are now learning, those transfers don't last forever, and spending on their basis may be more tentative than spending from income one thinks is more permanent. Seems we learned about this once. Between transfers and inventories, we are seeing a good deal of this statistical recovery based on temporary phenomena.