Wednesday, January 30, 2008

Year-to-Year Real GDP Growth Was Actually 2.5%!

WASHINGTON -- The U.S. economy braked sharply last autumn, pulling growth for all of 2007 to its lowest speed in five years as the housing slump took a heavy toll.

Gross domestic product rose at a seasonally adjusted 0.6% annual rate October through December, the Commerce Department said Wednesday in the first estimate of fourth-quarter GDP. The 0.6% pace was much slower than the third-quarter's racing 4.9% rate.

Comment: Real GDP growth in the second and third quarters of 2007 was higher than average, at 3.8% and 4.9%, respectively, and then dropped to .60% in the fourth quarter. But why does the media (see WSJ article above) focus so much on these quarter-to-quarter growth in real output? Shouldn't we also be concerned about year-to-year growth as well?

That is, why do we focus so much on 4th quarter 2007 real GDP in comparison to 3rd quarter GDP (0.60%)? Shouldn't we also pay attention to the growth rate in real GDP from a given quarter to the same quarter in the previous year? After all, coming off a 5% quarter like the third quarter, it's going to be difficult to always sustain that kind of above-average growth in the next quarter, and just returning to normal growth (on an annual basis) in the following quarter might make the economy look weaker than it really is.

Comparing real GDP in the 4th quarter of 2007 to the 4th quarter of 2006 (and doing the same for all previous quarters), real output grew at 2.5% in the 4th quarter of 2007 (see chart above), much higher than the .60% growth rate calculated from the previous quarter. Of course, the year-to-year measurement also brings second and third quarter growth down sharply to only 1.9% (vs. 3.8%), and 2.8% (vs. 4.9%). Quarter-to-quarter growth rates are always going to be more volatile than the smoothed annual rates from the same quarter in the previous year.

Buried in today's BEA report, we find this: "During 2007 (that is, measured from the fourth quarter of 2006 to the fourth quarter of 2007), real GDP increased 2.5%. Real GDP increased 2.6% during 2006."

Isn't this another possible indication that the economy is NOT in a recession? Notice that the graph in 2007 looks nothing like the graph in 2001, during the last recession (shaded area).

10 Comments:

At 1/30/2008 7:18 PM, Blogger Rick Ballard said...

Mark,

There was another nugget in that durables report which you cited earlier:

Unfilled Orders
Unfilled orders for manufactured durable goods in December, up thirty-one of the last thirty-two months, increased $20.0 billion or 2.5 percent to $808.6 billion. This was at the highest level since the series was first
stated on a NAICS basis in 1992 and followed a 1.2
percent November increase."

No layoffs coming in the durable sector that won't be offset by new hires. I'd say that the propability that the 1st quarter will show an increased GDP is pretty good. The only apparent kicker is bad weather slowing nonresidential construction. (Residential isn't going to get any deader.) Nonresidential permits are doing fine but this very cold weather (damned global warming) is causing project delays.

 
At 1/31/2008 9:39 AM, Anonymous marmico said...

Unfilled orders are not being shipped. Shipments of nondefence capital goods, excluding aircraft, (which is the GDP component) have been flattening for 2 years.

Are you serious about employment in the durables sector? A loss of 158,000 jobs in the 12 months ending December 2007 in the face rising unfilled orders. Surely, you jest!

The credit crunch has permeated the CMBS market and state & local governments are under budgetary pressures which are headwinds to nonresidential construction going forward.

This talk is at the margins in any event. If the consumer continues in hibernation like December, the economy is in recession.

 
At 1/31/2008 9:50 AM, Blogger Marko said...

Mark, I love this chart. I had been thinking the same thing. Dec 07 sales were over 4% better than Dec 06 retail sales, so how can people think our economy is in the tank? Another way of looking at it is that Q3 increased so much that a small increase in Q4 doesn't look bad at all. It is hard to sustain breakneck acceleration.

Another problem I have with the article you cite is that they say the economy is "braking" sharply. NO! The economy accelerated much less - so the right analogy is that we eased way off on the accelerator, but are still accelerating. Why don't people get that???

 
At 1/31/2008 9:53 AM, Anonymous Anonymous said...

Totally missed in the discussion of 4th quarter GDP growth was the effect of business inventories on the total number. While the growth rate was 0.6%, business liquidated inventories in the 4th quarter by $3.4 billion, resulting in subtraction to GDP of 1.25%. In other words, had inventories remained the same, GDP would have risen 1.85%, beating estimates.

Smaller inventories is a good thing from a business standpoint. Companies are in good shape to weather whatever is coming.

 
At 1/31/2008 10:23 AM, Anonymous Anonymous said...

In denial?

Okay, search your weak report numbers to support your views on the economy. It's a sick patient, despite all the medicine injected.

1) A war with defense spending that isn't saving the economy.
2) Emergency meeting fed rate cuts that help the stock market but won't save the economy.
3) A government that is desperately trying to stimulate the economy with rebates. This won't save the economy.
4) The dollar tanking.

I don't think the mainsstream media has done enough. the media were still singing praises of real estate into November 07. 60 minutes just had a segment on the foreclosure crises. They should have had that segment a year ago.

 
At 1/31/2008 12:04 PM, Blogger Marko said...

Your first three points beg the question - they assume that the economy is doing badly to prove the economy is doing badly.

Your last point doesn't hold up. The low dollar is proping up GDP growth through increased exports. I will admit it may also be pushing up the price of oil, but that has not really affected the price of gas, so not sure how it is overall evidence our economy is doing badly.

 
At 1/31/2008 12:29 PM, Anonymous Anonymous said...

You're not getting the point. The Federal Reserve and Federal government have recognized the downward spiraling economy. They are making adjustments to try and boost it.

Their action speaks louder than whether certain data meets the recession requirement.

Think of the dollar as falling stock. Lower dollar equals less interest/less value in the company - United States.

 
At 1/31/2008 12:56 PM, Blogger Rick Ballard said...

"The Federal Reserve and Federal government have recognized the downward spiraling economy."

The Feds have noticed that it's an election year and instituted a Vote Purchase plan wholly unrelated to economic conditions. The only good thing about it is that it pre-empts the Clinton's plan to lie about "The Worst Economy In A Gazillion Years" again.

 
At 2/01/2008 3:28 PM, Blogger Marko said...

I agree with Rick, sort of. There is a slowdown in the rate of growth, mostly because of panic. Panic is bad, so they are trying to soothe the panic by droping rates. In the short term, this fuels the panic though, because it provides proof to people on the margin that the economy is really bad. In the long run, it means we may get another bubble, so ride it on the way up and sell on the way down and laugh all the way to the bank.

 
At 2/01/2008 3:28 PM, Blogger Marko said...

I agree with Rick, sort of. There is a slowdown in the rate of growth, mostly because of panic. Panic is bad, so they are trying to soothe the panic by droping rates. In the short term, this fuels the panic though, because it provides proof to people on the margin that the economy is really bad. In the long run, it means we may get another bubble, so ride it on the way up and sell on the way down and laugh all the way to the bank.

 

Post a Comment

Links to this post:

Create a Link

<< Home