New unemployment claims also rose to 444,000, again exceeding “consensus expectations.”

There was also a report that will receive much less attention, but it is important. Inventories increased in November, the most recent month for which data are available. If inventories were increasing over the Christmas shopping season, and sales were declining, retailers ended the year with excessive inventory. That means reduced production in the first and second quarters of 2010.

2009’s third quarter output (GDP) growth was positive, and many expect a very impressive positive number for the fourth quarter, some as high as five percent. If the fourth quarter does come in with a strong GDP growth rate, it will be hailed as the harbinger of a soon-to-be-realized vigorous recovery.

Don’t buy that, and you won’t be disappointed.

That vigorous recovery may eventually come, but it is unlikely to come in 2010. Whatever growth generated in second-half of 2009 was government-supported consumption, ephemeral, not a solid foundation for economic growth, certainly not the basis for sustained vigorous job growth.

A vigorous recovery will be a result of investment, technological growth, and improved productivity. Recent productivity numbers have been encouraging, but in large part, they are probably the result of firms downsizing. Technological growth and solid job growth require investment, and that is the problem.

Our banks are in no condition to fund any vigorous expansion. Indeed, bank loans have been declining since October 2008. Businesses and consumers remain over-leveraged, unable to increase spending on consumption, unable to invest, desperately trying to reduce debt.

We won’t see a vigorous recovery until balance sheets are improved and banks can lend.

Government programs haven’t helped. Most of the spending programs have been consumption based instead of investment based. Some have been outright counterproductive, programs such as foreclosure-delay, paying interest on bank deposits at the Fed, and cash for clunkers. Even worse, the banking problem has been ignored, and now new taxes on banks are being discussed. That is as bad an idea as I’ve heard in a long time.

GDP is the broadest measure of economic activity, and the first estimate of fourth quarter GDP will not be out until the end of January. By far the largest component of GDP is personal consumption expenditures. It is fairly certain that fourth quarter durables consumption growth will fall – it was artificially boosted during quarter 3 by the Cash-for-Clunkers program. Non-durables and services consumption will likely be weak, but slightly positive, in part due to an expected weak holiday shopping season.

While quarter-on-quarter GDP growth was positive, year-on-year growth was negative, see the chart below. The year-on-year growth data is more stable than the quarter-on-quarter growth data as can be seen by comparing the second chart which shows the latter growth data. In addition, the year-on-year growth data is conceptually linked more closely to annual percent changes than the quarter-on-quarter growth data. The year-on-year growth data show the economy has, in fact, not recovered at all.

Residential real estate investment is a wild card, but not a particularly big one. It surged in quarter 3 due to the Federal Homebuyer’s Tax Credit. Congress is likely to extend this tax credit prior to the December 1 expiration date. The billion dollar question is: how many families remain who will take advantage of that credit? If there are few, then fourth quarter residential real estate investment will fall relative to the third quarter, weakening fourth quarter GDP.

While Cash-for-Clunkers has expired, the Federal Homebuyer’s Tax Credit is likely to be expanded and extended. A bill is moving through the Senate. Once the bill gets to the House, prospects for passage are high. In addition to extending the $8,000 credit to first-time homebuyers, a new $6,500 credit for returning homebuyers will be available for applicants who have lived in their home for at least five years.

Going forward, the extended and expanded Federal Homebuyer’s Tax Credit could provide additional stimulus to the economy through residential fixed investment, and to a lesser extent, consumer durables. We wonder how much of the related home purchases are adding debt to the household sector. Part of the reason the housing market collapsed was excessive leverage. If the debt levels are still too high, and they may be, this tax credit may be creating more future pain in housing.

We expect motor vehicle sales to be noticeably weaker in fourth quarter, because third quarter sales included purchases that were moved forward from fourth quarter. We expect high unemployment rates, high mortgage defaults, and high foreclosure rates will persist through the fourth quarter and beyond. These will imply at least some weakness in all consumption categories.