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What Has Carried the Recovery?

Jason Stipp

Jason Stipp: I'm Jason Stipp for Morningstar.

Over a year into the economic recovery, we want to take a step back and see how far we dropped throughout the recession, how far we've come back, and what have been the biggest contributors to GDP growth.

Morningstar's Bob Johnson, director of economic analysis recently dug into the data, and he is here to tell us little bit about what he found.

Thanks for joining me, Bob.

Bob Johnson: Nice to be here.

Stipp: So can you give us a big picture take: how far we went down and how far we've come back so far into the recovery.

Johnson: Well, in terms of GDP this recession we fell 4.1%. And that's roughly marked from December of 2007 to the middle of 2009. So, also one of the longest recessions that we had, and that's a 4.1% total decline.

Now, in the recovery, measured again from June of 2009 until the end of September, which is the last time we have data for, we're up about 2.9% in terms of GDP. So we haven't gotten everything back yet.

Stipp: So, would you characterize this, so far, as a somewhat subpar recovery. Was it a little bit weaker than you might expect given how far we dropped?

Johnson: Well, ... I had hoped for more of a V-shaped type of recovery than we actually got, because usually the harder you fall the better you recover, and for a number of reasons we didn't see that this time. I think housing is certainly a part of that equation. Usually housing construction comes back, and we didn't see that this time around, and the consumers' penchant for buying overseas goods this time was a little bit stronger, and that held us back a little bit as well.

So, it's been a subpar recovery. It's better than recovery of 1990, and better than the recovery of 2001, the two previous recessions, but not as good as some of the ones like the 1980 and 1970 recovery.

Stipp: You recently dug into the data to figure out what has contributed to the recovery--what have been the major factors driving it. It's really a fascinating look into the nature and the construction that we had coming back out of this recession. Can you talk a little bit about what were some of the biggest additive things to GDP since we started to have the economy come back online?

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Johnson: Well, if you look overall, again this June 2009 through the September quarter period, the biggest contributors were actually exports. So, the people would say we should really crack down and do protectionism here--I think that's wrong, because it was clearly one of the things that help lead us out of the [recession]. It was one of the two strongest categories.

The other was inventories. Corporations just completely depleted their inventories. They got so scared in the middle of the recession that anything they shipped, they shipped from inventory. If it wasn't from inventory, they didn't make it. And so it's also in that group of two biggest contributors to the overall numbers.

Stipp: Now, on the issue of inventories. If we've rebuilt those inventories, if we've replenished them, would you say that a lot of the powder has been used up for the recovery? Can we still continue to see growth if inventories have come back online?

Johnson: Well, I think that's one of the big themes for 2011, Jason, and you've hit it on the head, is that inventories were a huge contributor to the recovery, and maybe a couple percent of the almost 3% that we've got in terms of GDP recovery. So, it's been a huge factor. But we're probably not going to see that big a contribution looking into 2011. It's going to have to come from the consumer.

And the news on that front, though, thankfully is good. The holiday season was exceptionally strong, and now to follow up on that, we're going to have a payroll tax cut that takes effect in January that will throw some more money at the consumer.

So, I'm pretty optimistic that while the consumer has been a relatively smaller contributor, kind of in the 1% range so far in the recovery, it will move up into the 2% to 3% range as we move through 2011, offsetting the inventory not being as bigger factor.

Stipp: And on the negative side, what things have really been headwinds? What have held us back in this recovery and haven't contributed to the growth that we've seen so far?

Johnson: Well, consumer services have certainly been one of the things. While consumer goods have been really strong, services have made a very slow recovery. A lot of that's in health care, where people weren't going to the doctor as much as they used to. They didn't have the health insurance, they were between jobs, their COBRA was expiring. We really haven't seen that in lot of other recessions, and so the health-care recovery has been slow here, and it has held us back.

Certainly, business construction has held us back; actually in the recovery, it's down. It actually didn't peak until we were pretty far into the recession. So, if you mark it from June to now, construction has actually taken off of GDP, and one of the things I'm optimistic about next year, based on the Architectural Billing Index and a couple of other factors, is that I think at least industrial construction has probably bottomed out and won't be a detractor from GDP like it has been so far this recovery.

Stipp: So, you've already given us some hints about what you're expecting for 2011. If you had to continue this chart that you've made about the contributors, the detractors, one year into it, you said you're expecting to see more on a consumer front. What do you think might be some of the other things that are among the biggest contributors? And then what do you think might turn out to be a headwind next year?

Johnson: I certainly think that the consumer is going to be the leader. They almost have to be at this stage of the recovery. You can't look at a lot of other factors. What happens in the cycle is, nothing happens if the consumer moves first, and then everything reacts to that. And I think that's what everybody has to keep in mind about the economy. Manufacturing doesn't grow on its own; it grows because of demand from consumers. And so watch the consumer, and you'll be on top of the game.

So, consumer, I think, will be stronger; business investment looks like it still has more room to go. Our industrials team has done some excellent work showing that businesses have substantially underinvested during the recession, and they're going to have to make up for it as volumes come in here in 2011; as consumers buy things, they'll actually have to invest more on plant and equipment and software and so forth. So I think that's going to be the other big category.

I think exports will continue to do OK. There is a little question of what Boeing does for us in 2011, does the 787 ship or not. Aircraft are a surprisingly large portion of our export numbers. Detractors remain to be seen: If the consumer is going to continue his strong desire for imported goods, that's really held things back here. If we spent a little bit more on services or things manufactured here, we would be doing just a little bit better, and that may be something that helps 2011 a little bit. I'm not counting on a lot, but that might be the surprise area.

Stipp: Certainly, an area to keep a close eye on.

Bob, thanks so much for the extra context and digging into the data for us. I appreciate you being here.

Johnson: Great to be here. Thanks.

Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.