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Thursday, August 28, 2008

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."


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. ...

    Posted by on Thursday, August 28, 2008 at 12:51 PM in Economics | Permalink  TrackBack (0)  Comments (24)


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