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Business Costs & Regulation

GDP Recovers Its Recession Losses

Although there’s no more talk of a double dip, even stronger economic growth is required to pull down the unemployment rate

The economy has turned a corner. Although the pace still isn’t what it should be, the fourth-quarter GDP gain of 3.2% shows an impressive mix of consumer spending, exports and business spending. In real terms -- after wringing out the effects of inflation -- GDP at the end of last year finally recovered the ground it lost during the recession, indicating that the economy is now in an expansion phase once again.

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We look for GDP to increase about 3.5% this year, helped by the tax cut deal worked out between President Obama and congressional Republicans in December. The extended unemployment benefits, payroll tax cuts and additional inducements for businesses to buy new equipment will reinforce growth that is already being fueled by both consumer spending and business investment. Exports will also help lift 2011 growth over the 2.9% rate racked up for all of 2010.

What’s more, the increase in consumer spending in the fourth quarter eases concerns about the extent to which previous quarters’ growth relied on inventory restocking, which might have had growth boomeranging if the goods remained unsold in warehouses and stores. For 2011, consumer spending, which accounts for more than two-thirds of GDP, will likely expand by 3%, up from a 1.8% gain last year and a decline of 1.2% in 2009.

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As good as it will be to see growth increase, an annual gain of 3.5% is not enough to make much difference in unemployment. It would take growth of 4% for a full year to lower the unemployment rate -- now at 9.4% -- by just one percentage point. Federal Reserve Chairman Ben Bernanke estimates that with growth around 3.5%, it would take five or six years for the job market to normalize fully.

And some significant obstacles remain in the path of growth this year. While there are signs that banks are willing to make more loans, it’s still especially tough to secure the funds to launch the small businesses that are typically the biggest engine of job growth. Credit card ceilings are lower than before the recession, and its virtually impossible to tap the spigot of home equity. In fact, the lousy housing market continues to be a roadblock: home prices, declining again, threaten to dampen consumer spending.

In addition, reduced government spending in 2011 means it won’t contribute to growth. States and municipalities face serious budget crises -- likely to lead to reductions in their spending. And at the federal level, President Obama wants to freeze domestic spending, while the Republicans want to go further and make cuts.

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