GDP Growth Revised Upward

Reactions to today's announcement that second quarter GDP growth has been revised upward from 1.9 percent to 3.3 percent:

A booming economy?, by Andrew Leonard: The Department of Commerce has revised its figures for second quarter GDP growth rate to 3.3 percent, up from the previously reported 1.9 percent, and a significant rise from the first quarter's 0.9 percent growth rate. 3.3 percent GDP growth rates are not normally associated with recessions.

One early reaction:

"Ha ha ha. And if you believe that data, I also have a bridge for sale in Brooklyn." -- The Big Picture.

The Economist's Free Exchange sheds a little more light:

It's a big flashy number, but it probably doesn't mean all that much. The first second-quarter GDP revision is in, and the 1.9 percent growth rate has been pushed up to an incomprehensible 3.3 percent. Quarterly growth was due almost entirely to exports, without which the economy would have been roughly flat. Bad news, since the dollar is rising and the rest of the world is tightening the purse strings.

As noted here when the Commerce Department released its first guess at the quarterly GDP numbers, "Trade, in other words, is the current American lifeline."

Bloomberg:

The smallest trade deficit in eight years was the biggest contributor to growth last quarter. The trade gap narrowed to a $376.6 billion annual pace and added 3.1 percentage points to growth, the most since 1980.

But free-trade fans shouldn't expect the new numbers to change any hearts and minds, in, say, Ohio. The total number of Americans receiving unemployment benefits reached a five-year high of 3.4 million. According to Calculated Risk, "By this measure, the economy is clearly in recession."

Dean Baker focuses on what it means for manufacturing:

Machinery Leads Rise in Durable Goods Orders, Beat the Press: There was a more rapid rise in durable goods orders in July than most economists had predicted. While this rise received considerable attention, and seems to have sparked a rally in financial markets, the media largely overlooked the 4.6 percent increase in orders for machinery, which was one of the largest sources of the increase.

Machinery has seen the strongest growth in orders this year, with an 11.0 percent increase year-to-date compared with 2007. (Primary metals has had a somewhat larger rise, but this is likely due in large part to higher prices.) The machinery orders are presumably associated with an increase in manufacturing capacity. Increased demand for manufacturing is in turn likely the result of the improved competitiveness of the United States due to the fall of the dollar.

...It appears that the declining dollar is having the predicted effect on manufacturing, which is the best hope for a sustained recovery from the current downturn.

Real Time Economics at the WSJ says not so fast:

Don’t Turn Off Recession Siren Yet, Real Time Economics: Although revised second quarter gross domestic product figures released Thursday suggest the U.S. is nowhere near a recession and may even have grown faster than its noninflationary potential, an alternate measure the Federal Reserve looks at shows significant weakness.

GDP swelled 3.3% at an annual rate in the second quarter, ... meaning the economy grew at more than a 2% annual rate during the first half of the year — a time when many economists, including Federal Reserve staff, thought it would shrink.

But the forecasts of a shrinking economy may not be so far off the mark after all. Gross domestic income, which Fed officials have in the past highlighted as perhaps a better measure than GDP, advanced just 1.9% at an annual rate last quarter after contracting the two previous quarters. Thursday’s report is the first to show first quarter GDI in the red. ...

GDP is a consumption-based measure, adding up consumer, business and other spending and investment as well as net exports. GDI is income-based, adding up things like personal income and corporate profits. ...

In theory, the two should equal each other, but they don’t always. ... The difference between GDI and GDP is more than just academic.

In a Fed paper released last year, Fed economist Jeremy Nalewaik wrote that “real-time GDI has done a substantially better job recognizing the start of the last several recessions than has real-time GDP.”

Fed officials have even taken notice. ...[I]t seems likely that Fed officials will ... take 3%-plus GDP growth with a big grain of salt.

And there are other signs that support this view. From yesterday's WSJ:

Worker Confidence Sinks To '01 Recession Level, WSJ/AP: American workers' confidence in the job market is as low as it was during the 2001 recession, according to a new survey.

When asked whether this is a bad time to find a quality job, 65% said it was, matching the level of the 2001 recession, according to the survey by Rutgers University ... released Thursday.

With unemployment at 5.7%, the highest level since 2004, and with weekly unemployment claims hitting a six-year high earlier this month, workers are worried about everything from their weekly hours to their total pay. ...

The survey found one-third of workers said they often don't have enough money to make ends meet.

About one-third of respondents say the amount they owe on credit cards exceeds their retirement savings; another 3% say their credit-card debt would cancel out their retirement account...

Only half of respondents said they are working the number of hours they want to work and a third say there has been a change in the number of hours they work in the past three months. Eighteen percent were working more hours, and 14% worked fewer.

I don't think the picture is completely clear yet, the signs from labor markets are much weaker than the GDP revision suggests. Even after today's revision, which won't be the last revision for this data point in the GDP series, the view is still pretty cloudy.

Update: Menzie Chinn adds "Why Does It Feel Like a Recession?":

It's clear that the amount that we're expending on (from consumers, businesses, and government) is barely growing... So the factories may be humming, but that's because exports are up, thereby illustrating how much continued growth in GDP depends upon the trends in the rest of the world.

Figure 4 illustrates why... It's because the prices for what we produce have diverged in a significant way from the prices for what we consume.

To me, this last outcome is not a surprise [3] (pdf). When a country consumes much more than it produces, then at some point, it has to repay some of the debt incurred. Repaying involves producing more than consuming. We're not even at that point yet -- we're merely moving toward producing more than we're consuming. How much longer the process will continue, and how far (i.e., will we actually run a trade surplus in the foreseeable future?) depends on a lot of things, including the desirability of American assets, and hence how much foreigners want to lend to us. ...

Comments

[anne]

There is a peculiar kind of "recession," a labor market recession in which job creation has been negative in every months since December 2007 and ordinary wages have declined in real terms in 6 of 7 months. There is however not necessarily an actual recession, and there may not be since there has long been so much stimulus. But, this quarter there will be another slowing from 3.3%.

What has puzzled me is why the labor market should be so weak given low and lowered taxes, low interest rates, significant deficit spending, and till quite recently fine corporate revenues and a buoyant international economy.

[kthomas]

"What has puzzled me is why the labor market should be so weak given low and lowered taxes, low interest rates, significant deficit spending, and till quite recently fine corporate revenues and a buoyant international economy."

I can't tell sometimes when you're being funny or serious.

[save_the_rustbelt]

The econo-guessers just gave McCain a boost, by accident I think.

Unfortunately some people are going to actually believe this bilge.

Repeating myself, perhaps the standard economic measurement tools no longer make any sense in a globalized world.

And even if the pie is really bigger, the slices are going to fewer people.

[save_the_rustbelt]

Anne's question does make some sense.

To repeat, even if the pie is bigger, fewer people get a slice or own a fork.

[anne]

Warren Buffett in 2000 explained to investors that the sort of labor market that we find since then could not exist. Buffett was wrong, and when so wrong for so long that is important. Labor was weakened domestically in puzzling quick ways, especially so since these years have been so unlike the 1990s and the quickness of weakening must be important.

[Michael McKinlay]

These figures confirm that we are now a third world economy.

Our financial model and income distribution models have diverged to the point where even as the country as a whole prospers the bottom 4 quintiles lose ground.

[Winslow R.]

The GDP bump we see here is the difference between mailing Americans a rebate check to spend and a paycheck to build infrastructure.

The GDP growth should show rapidly around the world in spikes in GDP in countries around the world while U.S. unemployment continues to rise.

[Too Much Fed]

My easy answer: a worldwide oversupplied labor market with free trade agreements so that business people can exploit workers.

Cheap labor leads to cheap debt leads to wealth/income inequality and asset bubbles.

says...

What has puzzled me is why the labor market should be so weak given low and lowered taxes, low interest rates, significant deficit spending, and till quite recently fine corporate revenues and a buoyant international economy

Right. The implicit assumption being that the markets are right and the real world is wrong. The reverse - markets are wrong, and the real world is the truth -- no we don't even go there. Nope. Markets are always right.

The absurdity of this really illustrates what's going on across the global economy. Markets are disconnected from reality. Modern economics assumes - like assuming a can opener - on markets that accurately determine prices and value assets. Markets do price discovery, and drive resource allocation and investment.

But all around the world, markets no longer have any relationship to the value of real world assets. These financial organs vital to 1st world economies no longer function. The Chicago mafia says - it is not relevant whether you have cancer, a cirhossic liver, or non-functioning kidneys. You are healthy, so eat drink and hallucinate.

And what are all the economists and central bankers doing? Their solutions to these problems involve perpetuating the disconnect between markets and reality by altering rules, asset values, measurements, and access in such a way that real values can't be effectively determined -- apparently motivated by fears of panics and popular backlash if the truth is uncovered. Possibly because real price discovery will hurt the masses, but wipe out the filthy rich.

Cooking the books is what free market economics has become. For a long time - the so called great moderation - they got a pass, because of history unfolding to their benefit. But it was just a case of being in the right place at the right time, and nowhere related to the free market quackery.

The cock crowing does not make the sun come up.

[R]

Machinery exports are up. I believe it. That's the sound of First World technology leaving the United States at fire-sale prices to BRIC economies, like Ford's sale of Jaguar and Landrover to TATA industries in India. They sure saved billions in development costs. Not only do we offload our jobs offshore, we also give them the technology to beat us at cheaper rates!

[Ronald Rutherford]

[ R says...

Machinery exports are up. I believe it. That's the sound of First World technology leaving the United States at fire-sale prices to BRIC economies, like Ford's sale of Jaguar and Landrover to TATA industries in India. They sure saved billions in development costs. Not only do we offload our jobs offshore, we also give them the technology to beat us at cheaper rates!]

R, are you serious? Your example really shows your jingoism. How was this "United States technology"? Seems Jaguar and Landrover were European technology that we were given{???}. Easy come easy go...

[Julio]

"What has puzzled me is why the labor market should be so weak given low and lowered taxes, low interest rates, significant deficit spending, and till quite recently fine corporate revenues and a buoyant international economy."

I wonder: if we assume globalization is gradually equalizing wages, would that remove the puzzle?
The mechanisms seem similar to "right-to-work" laws destroying unions -- with US workers, in this analogy, being the union workers, and foreign workers being the scab workers, and the "God-given right of capital to find the cheapest labor" being the "right-to-work" laws.

(And there are flaws in the analogy, I know, so don't pick at it, I just use it for illustration).

[Invisible Hand]

Much of the growth attributed to net exports is a statistical quirk, and the hacks at the Commerce Dept should have pointed this out instead of glorifying it.
See for yourself in the NIPA tables:
http://www.bea.gov/national/index.htm

Table 1.1.2 claims that Net Exports of Goods and Services added 3.1 points to real GDP (out of a 3.3 total). WOW!!
However, if you look at the actual current-dollar numbers, (Table 1.1.5) net exports of goods and services actually WORSENED from a $706 billion deficit to a $710 billion deficit.
There are several causes of this quirk, but the main one is that "real" imports are measured in 2000 prices rather than the prices we actually paid in 2008. Oil prices are the major culprit. This has happened before, especially when oil prices surged.

[Aaron]

But it is good news. Drop oil down to $25-$35 and we would have 90s style economic growth. Maybe better.

[anne]

Julio:

"I wonder: if we assume globalization is gradually equalizing wages, would that remove the puzzle?"

The problem is "here." I'm thinking.

[anne]

"Drop oil down to $25-$35 and we would have 90s style economic growth. Maybe better."

No; but keep on trying.

[Too Much Fed]

Why can't wages be equalized upward instead of downward? Is it because interest rates would rise and the bankers would NOT like it if more and more debt was NOT produced so they can collect interest payments???

[Too Much Fed]

I would say that 90's style economic growth would probably require an asset bubble in alternative energy along with some employment growth there.

[save_the_rustbelts]

Bankruptcy filings up 28.9 percent
Thursday, August 28, 2008 3:20 AM
By Tracy Turner
THE COLUMBUS DISPATCH
The effects of a struggling economy and a decline in the housing market have shown up in another barometer of economic health: bankruptcy filings.

Nationwide, there were 967,831 bankruptcy cases filed in the 12 months ended June 30, up 28.9 percent from the previous year, when cases totaled 751,056, according to federal court data released yesterday.

Of the new cases, 25,597 involved central and southern Ohioans.

[save_the_rustbelts]

Obama is promising 2 chickens in every pot, a pony in every stable and other promises he cannot possibly meet.

Now he promises to make government efficient.

Over promising is a dangerous political disease.

says...

Somebody needs to remind OB he was once a member of Congress. Not much desire to reform government during that tenure.

And than hugs Biden and praises Kennedy.

Time to find the rubber boots from the closet to wade through the crap.

[SanFranciscoJim]

GDP only measures domestic production, so imports are not included. Most of the inflation we have seen is in imported goods, namely oil, so CPI and the GDP deflator are quite a bit different right now.

I haven't had a chance to go over the numbers, but I am guessing that imputed rent is down in Q2, helping to keep down the GDP deflator (and actual consumer inflation as well).

People tend to notice the price of things they buy often in small amounts (gasoline) much more than things they buy rarely (autos). So subjective inflation is probably higher than it really is in our present environment. Aren't car and home prices plummeting right now?

[Invisible Hand]

SF Jim,

Actually, GDP does indirectly include Imports, and that is why quirks in the way we measure it have greatly exaggerated real GDP growth in 2008:2.
GDP includes Net Exports, which is Exports less Imports. This is a huge negative number, -$710.0 billion. In current dollars the number worsened in the second quarter, from -705.7 billion to -710.0 billion. However, "real" net exports improved from -$462 billion to -$376.6 billion. This less negative number for real net exports causes a big increase in real GDP.
However, this apparent increase in real GDP is really the quirky result of the "double deflation" method of measuring "real net exports" and is being misinterpreted.

[SanFranciscoJim]

We are saying the same thing, you just don't realize it. "Real" exports is exports less inflation, and since inflation has been high, the difference between nominal and real exports is bigger than normal. Usually it doesn't matter, since usually domestic and import inflation are similar, but right now there is a huge divergence.

It is not entirely clear to me that this is a valid way to measure it, but that is how it is done.