China, Growth, and the Weakness of Real GDP

Sara Hsu asks if All Growth is Good? The Case of China Of course, not all growth is good. It makes little difference, whether it’s economic or human tissue growth. Edward Abbey famously wrote that “growth for the sake of growth is the ideology of the cancer cell”. Obesity is another form of high-growth, yet it hardly improves well-being or health.

Unfortunately, we economists have not (yet?) developed measures that help us or policy-makers distinguish between healthy growth and malignant growth.  The only real comprehensive measure of growth we have is growth of real GDP. We do know better, as Sara notes:

Since the seventies, with the assertion by Gunnar Myrdal that economic development should prioritize equality, economists have increasingly come to believe that not all types of growth are wholly “good.” Growth that ignores human well-being and equality are viewed as problematic.  Certainly growth that results in severe environmental destruction, as in the case of China over the past twenty years, cannot be classified as good, either, despite the country’s much-lauded successes during this period. Real-world views of growth depicted in the mainstream media do not fall in line, however, with the economic development literature. The focus on China’s growth in the news has distracted from a more balanced view of the looming inequality problems or polluting production methods in the world’s most populous nation.  As China’s growth has slowed, headlines have read, “China’s Economic Growth at Stake,” “China’s Economic Growth Slows,” and “China’s Second Quarter Growth Slows.” –

Yes, China’s real GDP growth rate has been spectacular for several decades now. That growth has lifted literally hundreds of millions of people into better lives. Yet, in strange case of the metaphor becoming real, that economic growth has literally brought cancer with it. Specifically, many “cancer villages” along the Huaihe River.

China’s economy illustrates the problem of growth measured in numbers versus measured in real economic change. The surge in fixed asset investment carried out post-global crisis resulted in an inflation of growth figures, despite the creation of uninhabited apartment buildings, or even entire cities. This is socially unproductive growth, wasteful production, “bad” or false growth. Although the distinction between “good” and “bad” growth exists only in theory, it is essential to clarify the difference to the public in order to move along the path of long-term development.

Admittedly, it may be overambitious to request that a more comprehensive view of growth penetrate the media. However, it would benefit our understanding of China’s economic performance; reconceiving growth would increase competition to generate “good” growth and discourage the race to build businesses that produce “bad” growth.

Yes, I agree. It is indeed an ambitious project, the idea that we could create more comprehensive measures of growth that help us to separate healthy improvement in well-being from cancerous, destructive economic growth. But it seems to me no more an ambitious goal than the vision less than 100 years ago to create the national accounts systems and begin collecting the data (from whence we get GDP measures).

November Employment and Revised 3rd Qtr 2011 GDP

I’m a few days late but I wanted to note the latest employment (jobs) report and the first revision to 3rd quarter GDP.  There’s really not much news here – it’s the same old story. The economy continues to move along somewhat like  a zombie.  Not really dead, but definitely not anything you could call “living”.  That’s particularly true if you’re one of millions of unemployed who need a job to “make a living” but can’t get one.

CalculatedRisk Blog tells us:

From MarketWatch: U.S. economy adds 120,000 jobs in November

The U.S. gained 120,000 jobs in November and the unemployment rate fell to 8.6% from 9.0%, the Labor Department said Friday. The government also revised jobs data for October and September to show that 72,000 additional jobs were created. … Hiring in October was revised up to 100,000 from 80,000 and the job gains in September were revised up to 210,00 from 158,000. In November, companies in the private sector hired 140,000 workers … Government cut 20,000 jobs

Employment Pop Ratio, participation and unemployment ratesClick on graph for larger image.

The following graph shows the unemployment rate. The unemployment rate declined to 8.6%.

Some of the decline in the unemployment rate was related to a decline in the number of workers in the labor force.

Percent Job Losses During RecessionsThe second graph shows the job losses from the start of the employment recession, in percentage terms. The dotted line is ex-Census hiring.

This was still a weak report, and slightly below consensus.

The headline unemployment rate declining from 9.0% in October to  8.6% in November is deceptive.  It is NOT because economic growth created enough new jobs to start making a significant dent in the millions of unemployed.  Instead it was almost entirely due to the labor force shrinking.  In other words, approximately 300,000 would-be workers abandoned their search in frustration and discouragement.  If the economy starts to grow briskly (not much chance of that happening) then these discouraged and “marginally attached” workers will likely renew their searches and rejoin the work force.

Calculated Risk also tells us how just before Thanksgiving the estimate for 3rd quarter real GDP growth was revised downward.

From the BEA: Gross Domestic Product, Second Quarter 2011 (second estimate

Real gross domestic product — the output of goods and services produced by labor and propertylocated in the United States — increased at an annual rate of 2.0 percent in the third quarter of 2011 (that is, from the second quarter to the third quarter) according to the “second” estimate released by the Bureau of Economic Analysis.

This was revised down from 2.5% and below the consensus of 2.4%.

The downward revisions was mostly due to a large decline in the “change in real private inventories ” – this subtracted 1.55 percentage points from the third-quarter change in real GDP (second estimate) as opposed to 1.08 percentage points in the advance estimate. Final domestic demand was mostly unchanged (the inventories will probably reverse in Q4). Still sluggish growth …

The relatively large revision came from having better data about the change in business inventories.  In GDP accounting, when a business produces goods it counts as “production” and part of GDP, even if the goods haven’t been sold yet to a final customer.  Additions to inventory then are considered to be a form of “business Investment”.  A decline in inventories tells us that businesses (in aggregate) sold more from their inventories (previous production) than they produced.  A large decline in inventories can be either a good or bad sign.  It’s good if it happens because sales were unexpectedly higher than managements expected.  That would suggest that production would be increased in the next quarter.  On the other hand, a decline in inventories can also be a sign that businesses expect future sales to be weak and so they didn’t produce as much in advance.  We’ll have to see which it is.  Regardless of why the inventory adjustment was so large, a 2.0% real growth rate is unacceptable.  It wouldn’t even be acceptable at full employment, but with 8.6% unemployment it’s totally unacceptable.

Update on Current Situation – October Jobs Report and 3rd Qtr GDP

Two of the more important (U.S.) economic measures were reported in last week and half.  Yesterday the October jobs report came in.  The week before we got the flash report on 3rd quarter GDP.  Both measures were better than feared, not quite as good as consensus expectations of many forecasters, and overall still a disappointment.  First let’s look at the numbers and then I’ll comment. CalculatedRisk, as usual, reports the facts on the jobs report:

From the BLS:

Nonfarm payroll employment continued to trend up in October (+80,000), and the unemployment rate was little changed at 9.0 percent, the U.S. Bureau of Labor Statistics reported today.

The following graph shows the employment population ratio, the participation rate, and the unemployment rate.

Employment Pop Ratio, participation and unemployment ratesClick on graph for larger image.

The unemployment rate declined to 9.0% (red line).

The Labor Force Participation Rate was unchanged 64.2% in October (blue line). This is the percentage of the working age population in the labor force. The participation rate is well below the 66% to 67% rate that was normal over the last 20 years, although some of the decline is due to the aging population.

The Employment-Population ratio increased to 58.4% in October (black line).

Note: the household survey showed another strong gain in jobs, and that is why the unemployment rate could decline with few payroll jobs added – and the employment population ratio increase.

Percent Job Losses During Recessions

The second graph shows the job losses from the start of the employment recession, in percentage terms. The dotted line is ex-Census hiring.

Now we reach back to October 27 and CalculatedRisk again:

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 2.5 percent in the third quarter of 2011 (that is, from the second quarter to the third quarter) according to the “advance” estimate released by the Bureau of Economic Analysis.

The acceleration in real GDP in the third quarter primarily reflected accelerations in PCE and in nonresidential fixed investment and a smaller decrease in state and local government spending that were partly offset by a larger decrease in private inventory investment.

The following graph shows the quarterly GDP growth (at an annual rate) for the last 30 years. The dashed line is the current growth rate. Growth in Q2 at 2.5% annualized was below trend growth (around 3%) – and very weak for a recovery, especially with all the slack in the system.

So what’s happening.  Nothing much, really.  That’s the problem.  The economy is effectively going sideways.  Yes, we continue to grow, but the rate of growth is so slow that we aren’t really seeing any improvement in conditions.  For all of 2011 we have grown at a rate below the long-term historic trend of 3.0%.  We are struggling to keep up with population growth and not really doing anything to “put people back to work”.  hat’s not a recovery.  That’s society throwing 5% of our workforce off the bus 3 years ago and saying “so long” forever.  It should be unacceptable, especially when it’s possible to do much better.

The Great Recession Was Even Worse Than Thought

In yesterday’s release of the 2nd quarter 2011 GDP numbers for the U.S., the BEA also revised some past numbers.  This is not an unusual event.  It’s routine. But the news and revisions this year were disturbing and sobering.

First, a little about how GDP numbers are reported.  In this day and age of instant info when stock markets report numbers within seconds, we tend to think we should get all our data that quickly.  But it’s a really tough job.  Think about it.  GDP is the total market value of all the goods and services produced in a period of time.  For the U.S., that’s a lot of stuff.  There’s over 300 million of us buying things, making things, providing services, etc. The BEA has to add all that up.  Actually it’s got to find out what we did before it can add them up.  Some of the activity must be estimated.  Hard data on a lot of production isn’t even available until months or even years afterward.  In addition, to estimate real GDP from nominal GDP (nominal is what’s observable at current prices), they have to collect immense data on prices of nearly everything.  Looked at this way,they do a pretty good job.

So what happens is that each quarter they release three “estimates” of GDP and growth rates.  The first version is released at the end of the month after the quarter closes. This is the “advance” estimate.  That’s what we got yesterday, on July 29, for the quarter ending June 30.  Next month in late August they will issue a  revision of this number based on more and better information. Then in late September comes the “final” estimate based on even better analyses.  Then they start over in October with the 3rd quarter “advance” estimate, etc.  But in July each year, the BEA takes the opportunity to revise any of the data for the previous year, and at times for several previous years.  There’s nothing sinister here, just more time allows a better, more precise estimate.  And that brings me to yesterday’s news.

The BEA revised GDP numbers back to 2003.  Most of the numbers from 2003-2007 were pretty much unchanged, but from 2007 there’s a significant revision, a significant downward revision. The change shows that the Great Recession (what I prefer to call the Lesser Depression or Workers’ Depression) in 2007-2009 was much worse than previously reported. Instead of losing close to 5% of GDP in the recession, we lost close to 6% of GDP.  Calculated Risk shows the revisions graphically:

The following graph shows the current estimate of real GDP and the pre-revision estimate (blue). I’ll have more later on GDP.

Real GDP

The revisions also mean (as the graph shows) that we aren’t back to where we were in 4th quarter 2007 yet.  In other words, it’s almost four years after the recession began and we still have an economy that’s producing less goods and services than we did back then.  Keep in mind that our population is close to 3.5% larger now than it was then.  Kind of explains the bad the feelings you’ve been having, huh?

Another implication of the revision is that it clearly shows that the government policy response has been grossly inadequate.  The Obama stimulus program, which was clearly too small to deal with even the recession as we thought it was then, was definitely much, much too little.  Given what we now know of the size and scope of the recession, the government stimulus program needed to be at least twice, perhaps three times, as big as it was.  And, it needed to be more focused on stimulating demand through actual spending instead of having 40% of the money be tax cuts that wouldn’t be saved and wouldn’t help the economy.

Finally, a perusal of the graph shows us two things.  First, we lopped off a big chunk of the economy in 2007-09.  That’s lost opportunity.  It’s lost income. And it’s the 10%+ unemployment rate.  But more disturbing is the fact that the so-called “recovery” since then, a recovery that hasn’t gotten us back to the beginning, is itself running out of steam.  The curve is flattening in 2011.  That’s because the rage in Washington by both Republicans and the President has been for budget-cutting.  Budget cutting is contractionary fiscal policy.  They’re trying to slow down the growth of an economy that’s pretty much already run out of steam.

GDP for 2nd Qtr: Economy In “Growth Recession” – Very Bad News

The Bureau of Economic Analysis released the “advance estimate” of 2nd Quarter 2011 GDP growth.  The numbers are bad.  Worse than most analysts expected.  I’ll let BEA explain:

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 1.3 percent in the second quarter of 2011,
(that is, from the first quarter to the second quarter), according to the "advance" estimate released by the
Bureau of Economic Analysis.  In the first quarter, real GDP increased 0.4 percent.

A 1.3 percent annualized growth rate is very bad.  Yes, it’s a positive number which indicates real growth and not decline, but it’s not enough to keep people even, let alone putting unemployed people back to work.  What’s worse, the BEA, as part of it’s annual revision process in July of year, revises the past numbers based on better data and better information than what was available at the time.  They revised their estimate of real GDP growth in first quarter 2011 down to 0.4% annualized rate from the previously estimated 1.8%.

Putting both quarters together it means the U.S. economy has grown at a 0.8% growth rate for the first six months of 2011.  As said earlier, yes, that’s a positive number so it indicates “growth”.  But that’s growth in the total or aggregate size of the economy.  During those same six months our population grew at a 1% annualized rate.  So do the math.  The pie is 0.8% bigger but there’s 1% more mouths at the table.  It means less per person.

I’ve mentioned before how economists have an inadequate vocabulary when it comes to describing the condition of the economy.  We tend to use only the terms “recession”, which means decline or negative growth, and “recovery” which technically means “not a recession” or any positive growth rate.  But not all positive growth rates have positive results.

There’s an unofficial term used in economics called a “growth recession”.  A growth recession is when real GDP is growing – the rate is above zero – but it’s too small to really make an improvement in living standards or improvement in employment.  That’s where we’re at now.  We’re in a “growth recession”.  Technically GDP is still growing, but it’s so slow and so weak that unemployment will actually rise.

Today’s news on GDP in first and second quarters has taken many most analysts by surprise.  But it really shouldn’t be a surprise.  The Obama “stimulus” spending program started in 2009, which was way too small to begin with, is being phased out. With it federal government spending in the first six months has actually declined.  The biggest culprit in the weak GDP numbers though is consumption spending by households.  It has come to a virtual standstill at the end of June.  Why?  Well, unemployment is rising again – no jobs, no money to spend.  Unemployment compensation has been cut in many states and many long-term unemployed have run out of benefits.  Again, that cuts spending.  And in Congress, Republicans with Obama’s help have been pushing a cut-spending, cut-deficits agenda.  In economics this is called “contractionary fiscal policy”.  And that’s what we’re getting – a contraction of GDP.  No surprise really.

 

GDP 1st Qtr 2011 – Revised

I missed posting this a few days ago.  Bureau of Economic Analysis says first revision of the GDP estimate for 1st quarter 2011 was essentially unchanged from the initial “flash” estimate provided at the end of April.  The U.S. economy grew at approx. 1.8% annual rate.

While the overall growth rate was unchanged, there was some shuffling among the categories.  The revised numbers indicate that consumption spending (C) was weaker than initially thought, accounting for only 1.53 points of GDP’s 1.8 percent growth rate as opposed to the original 1.91.

Offsetting this lower estimate of Consumption spending was a larger than originally thought increase in Inventories (part of I, Investment spending).

This is not a good sign.  It says that consumers are slowing their spending more and that as a result firms ended the quarter with more inventory than expected.  That tends to signal an economy slowing more than businesses had expected.

There’s a lot of headwinds and “aftershocks” that are hitting the economy now. Among them:

  • continued high oil and gas prices
  • slowed production and sales in the auto industry due to supply chain bottlenecks from the Japanese nuclear meltdown, earthquake, and tsunami
  • continuing cuts in government spending at all levels.  State and local governments in particular are cutting a lot.  Congress and the President have evidently decided this year that it’s more important to cut government spending and borrowing (despite less than 3% interest rates) no matter how much it slows the economy and raises unemployment.  Together state, local, and federal government cuts in spending reduced GDP growth rate by 1.09 points.  In other words, if we had simply continued spending at the existing rate instead of cutting, we could have had at least a 2.9% GDP growth rate.
  • Europe is having a lot of difficulties with their ill-designed monetary union and their ill-advised austerity policies.  Europe is slowing dramatically and some countries are falling back into recession.  Not good for overall global growth or U.S. exports.
  • China is struggling to contain it’s inflation and may need to slow down it’s growth rate.
  • and most significant, unemployment and wages continue to play out a depression for workers. 

Downbound Again: GDP in 1st Quarter

Yesterday the “flash” estimate for GDP growth in 1st quarter 2011 was released.  Not good. GDP only grew at a 1.8% annual rate, down from the 3.1% we experienced in the 4th quarter of 2010.  This is very disappointing, but not really surprising. Before I comment, I’ll let CalculatedRisk report and show one of his great graphs.

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 1.8 percent in the first quarter of 2011 (that is, from the fourth quarter to the first quarter) according to the “advance” estimate released by the Bureau of Economic Analysis

GDP Growth RateClick 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 current growth rate. Growth in Q1 at 1.8% annualized was below trend growth (around 3.1%) – and very weak for a recovery, especially with all the slack in the system.

The graph really puts into context just how slow and disappointing this “recovery” has been.  The recession of 2007-09 (the blue shaded area) was worse than the recessions in the early 1980’s.  But look at how fast the economy was able to recover from those earlier recessions. Growth rates in 1981, 1983, and 1984 were well over 6% and at times over 8%. The economy truly “recovered” the ground lost in the recessions before settling down to the long-term growth trend (the dotted line).  In contrast, we are almost two years into this poorly-named “recovery” and we are struggling to even get up to the long-term growth rate.  We haven’t really recovered at all.

It’s worse, though.  The signs are pointing down.  To recover, we needed to have better than 4th quarter growth.  But instead, things are slowing down.  And they are slowing down despite having gotten some significant stimulus at the beginning of the first quarter.  Remember last December Congress and President extended the large Bush-era tax cuts for the top-bracket income earners.  Republicans told us it was necessary to grow the economy and create jobs.  We also cut the payroll tax for this year only for Social Security as an attempt to stimulate the economy.  The Federal Reserve implemented Quantitative Easing II program throughout the first quarter, promising us it would stimulate the economy. Yet despite these efforts to stimulate the economy, the economy is actually slowing.

Why?  Let’s look at the data.  There’s lots of culprits, but the most significant ones are drops in Investment spending and drops in Government spending. Again, Calculated Risk reports from the  BEA news release yesterday (emphasis mine):

• Investment: Nonresidential structures decreased 21.7 percent… and real residential fixed investment decreased 4.1 percent.

Government spending subtracted 1.09 percentage points in Q1 (unusual)

Basically it’s two big things.  First, Investment spending is decreasing overall, not increasing.  The exceptions were increases in inventories (business probably expected more sales than they got) and sales of software grew.

The second one is the disappointing one.  Government spending dropped so much that it subtracted 1.09 percentage points from the growth rate.  In other words, instead of the weak 1.8% growth rate, we could have had at least a 2.9% growth rate if only we had kept government spending unchanged.  Instead we have been cutting government spending like mad.  The federal government’s 2009 stimulus bill is over. The spending’s gone and now total spending is declining.  More significant is that state and local governments are cutting spending big time.  And state and local governments are cutting business taxes so that they have cut to spending even more.

It’s really not a surprise.  We’ve known for at least 75 years that cutting government spending is contractionary – it slows the economy.  Yet our so-called leaders in Washington persist in cutting right now at a time when the economy needs help, not hindrance.  All the first quarter numbers have proven is that, yes, contractionary fiscal policy (cutting spending and cutting the deficit) is indeed contractionary.  Well duh.  What is amazing is how so many politicians and businesspeople and bankers keep claiming that somehow, someway, if we cut spending and the deficit, some magic “confidence fairy” will inspire the entire economy to grow despite a lack of demand.

As Brad Delong put it:

Contractionary fiscal policy is contractionary.

With overall government spending on the decline and with severe aftershocks from the Japanese earthquake and rising oil prices, we’re down-bound again.  Buckle up.