GDP 4th Quarter 2010

The numbers for the flash estimate are out today from BEA for U.S. GDP growth, 4th quarter 2010.  I’ll let Calculated Risk summarize the headlines:

Advance Report: Real Annualized GDP Grew at 3.2% in Q4

by CalculatedRisk on 1/28/2011 08:30:00 AM

From the BEA:

Real gross domestic product — the output of goods and services produced by labor and property located in the United States — increased at an annual rate of 3.2 percent in the fourth quarter of 2010, (that is, from the third quarter to the fourth quarter), according to the “advance” estimate released by the Bureau of Economic Analysis.

GDP Growth Rateby CalculatedRisk on 1/28/2011 08:30:00 AM Click on graph for larger image in graph gallery.

This graph shows the quarterly GDP growth (at an annual rate) for the last 30 years. The dashed line is the median growth rate of 3.05%. Growth in Q4 at 3.2% annualized was slightly above trend growth – weak for a recovery, especially with all the slack in the system.

A few observations:

  1. The non-recovery recovery continues.  As I explained earlier, economists haven’t properly defined “recovery”. We define a recession as reduction in GDP (actually a bit more complicated, but close). But we use “recovery” to describe any period after a recession ends.  It’s kind of like a man jumps of a tall building and once he hits the ground and stops falling, we say he must be “recovering” since he isn’t falling.  What appears to be happening is that we are resuming a “normal” growth rate (what’s normal for the last 30 years), but we aren’t really recovering from the recession. Instead, it’s probably better to describe things as those who survived the recession are continuing as they were before, but the 10 million or so unemployed and closed businesses are just out of luck.  They’re out of the picture and we’re moving on without them.
  2. GDP growth in 4th quarter would have been stronger except that businesses had a significant draw-down in inventory.  The inventory draw down surprised me a bit, I’m not sure what it indicates.  We’ll have to wait for the revision to maybe get a better idea. It could be a harbinger of better growth in 1st quarter if businesses seek to replenish that inventory.
  3. We’re still underachieving. It’s gonna be a long time getting back. Technically we have only now gotten real GDP back to a level it was at the end of 2007, the beginning of the recession. But, of course, the economy should have been growing at 2.5-3% per year for these last 3 years.  So the gap between what we are actually producing and what we should be capable of producing continues to be large – on the order of 7-8% of potential GDP. Gee, maybe that’s what those millions of unemployed workers could be used to produce!

One Quick Thing: GDP Not Good

I know I said I’d be on vacation, but thanks to 3G coverage, I can add this item today.  The second revision of 1st qtr GDP 2010 GDP growth rate was announced.  It’s revised down again, and it still looks like it’s mostly all the result of inventory accumulation.  So we have GDP = C + planned Investment + unplanned Inventory accumulation + G + net exports.   And the major reason the overall number is up 2.7% is due to unplanned Inventory accumulation.  We need C and planned Investment to increase — that’s a healthy economy.  But it wasn’t happening in 1st qtr and it looks like things have slipped or slowed since 1st quarter.   So I’m raising my estimate of the chances of a double-dip recession with negative GDP growth in the second half of 2010 to 50% or maybe 60%.

See Calculated Risk:

The Q1 real GDP rate was revised down again (third estimate) to 2.7% from the 2nd estimate of 3.0%.

Consumer spending was weaker in Q1 than originally estimated. PCE growth (personal consumption expenditures) was revised down to 3.0% in Q1 from the previous estimate of 3.5%.

Some more from Reuters: Economy Grew Slower in First Quarter than Expected, Up 2.7%

… business spending, which only rose at a 2.2 percent rate instead of 3.1 percent as reported last month. This was as a spending on structures was revised down to show a slightly bigger decline than reported last month. Growth in software and equipment investment was also lowered to a 11.4 percent rate from 12.7 percent.

Another drag on growth came from exports whose growth was eclipsed by a rise in imports, resulting in a trade deficit that subtracted from GDP.

… real final sales to domestic purchasers, considered a better measure of domestic demand, rose at a 1.6 percent rate instead of the 2.0 percent pace reported last month.

The “Change in private inventories” was revised up to a contribution of 1.88% from the previous estimate of 1.65%. So inventory adjustment accounted for over two-thirds of the GDP growth in Q1 – and the inventory adjustment appears over. This is a weak third estimate.

Posted by CalculatedRisk on 6/25/2010 08:32:00 AM

The Case of the “Disappearing Stimulus” and the “Illusory Inventory”

Worthwhile Canadian Initiative notes that sometimes, a reported slower GDP growth rate is actually better news than another slightly higher reported rate.  As I’ve noted repeatedly on this blog and in class, it’s important to look at the numbers behind the numbers.

When 5.0% GDP growth is better news than 5.9% GDP growth

In 2009Q4, US GDP grew by 5.9% at annual rates; the number was 5.0% in Canada. But our news was much better. Here is a graph of the contributions to GDP growth by expenditure category:

US GDP growth would have been only 2.0% without the contribution of the inventory terms (which was itself a deceleration in the rate at which stocks were being drawn down.) In Canada, the 2009Q4 GDP number would have been 5.8%.

And look at the contribution of government spending. In the US, the contribution was negative: the increase in federal spending was more than compensated by cutbacks at the state level.

It’s easy to see why the Canadian numbers were greeted with more enthusiasm than were those in the US, even though the headline number was smaller. Growth was evenly distributed across all types of expenditures, and we can expect inventories to bounce back as well fairly soon.

Two observations that I’ll emphasize here.  The first I’ve made before. Most of the reported GDP growth the last 2 quarters of 2009 has actually been inventory-driven.  That’s not sustainable, so we need to see Personal Consumption and Investment growing.  Until they do, the “recovery” is in jeopardy of double-dipping.

The other observation here is that the contribution of government spending in the US was negative.  I’m sure some readers will wonder “How can that be? What about the giant $780 some billion stimulus bill?”. Well the data don’t lie in this case.  We really have NOT had much government stimulus in 2009 in the US for 3 reasons.  Yes, there was a stimulus bill, but a very large portion of it was tax cut, not spending increase.  And as we talk about in class, while a tax cut can be stimulating, it is often not as stimulating as an equal amount of spending because people save part of the tax cut and do not spend all of it. The second reason is because the “giant stimulus” bill was spread out over 2.5 years, not all in 2009.  Finally, while the federal government increased spending, this increased spending has been largely offset by cuts in spending at the local and state levels.  Net impact: negative.    Does this mean that the stimulus bill was a bad idea? that it didn’t work?  NO.  It worked – just imagine how bad it would have been (how even larger the negative impact would have been) if states and local govts had cut and not been offset by the feds.

Inventories & GDP Explained

A good explanation of the role of inventories (and inventory changes) in GDP, including examples from 2009. From Calculated Risk.

First, GDP is Gross Domestic Production. What is being estimated is “domestic production”, but what is being measured is mostly domestic consumption.

Right away we can see that if something is produced domestically and then exported, it will not show up in domestic sales. So exports are added to the equation, and imports subtracted. Investment and Government spending are also added to measures of consumption, and we frequently see an equation like this for GDP:

Y = C + I + G + NX
C: Consumption
I: Investment
G: Government spending
NX: Exports – imports.

But what about changes in inventories? The same ideas apply. What is measured are sales and changes in inventory, and then production is calculated:

Production = Sales + Changes in Inventory
The following simple table shows how this works, and how it impacts GDP.

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