Wednesday, February 04, 2009

What Does Annual Real GDP Growth Tell Us?

Quarterly growth rates in real GDP receive a lot of media attention, and we hear a lot of comparisons of today's economic conditions to the Great Depression, but what about looking at annual real GDP growth over a longer period of time to get a little historical perspective? Tim Iacono makes that point here on Seeking Alpha. The chart above (click to enlarge) shows annual real GDP growth from 1930 to 2008.

Annual real GDP growth during the 2008 recession was +1.3%. Compare 2008 real GDP growth to Great Depression I, when there were 4 consecutive years of negative GDP growth, and real GDP in 1933 was -26.5% below the 1929 level. As bad as economic conditions are today, and even if they continue through 2009, any suggestions that we are in Great Depression II have to be dismissed. The current
consensus WSJ forecast (based on 55 individual forecasts) is for -.30% real GDP growth in 2009. Assuming that forecast is correct, a +1.3% real GDP growth in 2008 followed by -.30% in 2009 would suggest that we would be nowhere close to Great Depression II, and wouldn't even be close to some of the more recent recessions (see chart below, click to enlarge).

Much of the discussion about the "worst economy since the Great Depression©" assumes that we are already close to the economic conditions of the 1930s. The chart below of annual real GDP growth from 1970-2008 shows that the economic conditions of 2008 (measured by real GDP growth) aren't even as bad yet as the 2001 recession, when real GDP grew at .80% for the year. And assuming the consensus forecast of -.30% real GDP growth for 2009 is accurate, the 2008-2009 recession (+1.3% and -0.30% consecutive growth rates) would be a little more severe the 1990-1991 recession (+1.9% and -0.20%), but less severe than the recessions of 1974-1975 and 1981-1982.



15 Comments:

At 2/04/2009 10:10 AM, Anonymous Anonymous said...

See, there you go again, injecting reason into the discussion.

How's Obama going to get a trillion dollars out of our children and grandchildren if you keep knocking down the depression scare?

I mean really, it takes a lot of work to develope a sense of crisis, just listen to this

 
At 2/04/2009 10:24 AM, Blogger lineup32 said...

How do you expect the financial sector to get large bailouts without media hype? please start to grow up and understand the political/econmic reality!

 
At 2/04/2009 10:42 AM, Anonymous iamnorth@gmail.com said...

GDP is, itself, a questionable indicator.

It includes Government Spending. Our Government is spending dollars today (aka, Keynesian stimulus measures) that are borrowed from our futures and other countries.

And does GDP include monetization of US companies' goods manufactured in other countries and sold in other countries, never touching US soil or the product of American (human) resources other than an IT system or annual report?


"When a GDP is calculated, it includes all private and government spending, goods and services produced, and exports. The GDP is adjusted for imports and inflation to arrive at a number which is believed to accurately reflect the sum total of the nation's goods and services."

 
At 2/04/2009 10:44 AM, Blogger PeakTrader said...

By ignoring 95% of the economy (and turning 5% into 100%), there has been a lot of work to convince enough Americans the free market has been a complete failure. The prospect of an inevitable Great Depression is needed for massive government spending and intervention. It's a win-win situation for Obama. If there's a Great Depression or a more severe recession, he'll blame it on the free market and Bush. If there isn't, he'll say his economic policies prevented it.

 
At 2/04/2009 11:27 AM, Anonymous Anonymous said...

iamnorth: If "GDP is a questionable indicator" what indicator would you use?

 
At 2/04/2009 11:32 AM, Blogger PeakTrader said...

GDP is an incomplete measure of an economy, since it only reflects the production side. U.S. actual output has generally been below potential output throughout the 2000s. The U.S. economic boom in the 2000s took place on the consumption side.

In the 2000s, we saw uneducated Third World immigrants, who would have earned a few dollars a day in their home countries, if they could get a job, living in big houses, driving in almost new minivans or trucks, able to buy goods cheaply, etc. in the U.S. (e.g. working overtime in the construction or transportation industries), while 20% of U.S. households earned over $100,000 a year (e.g. in the high-tech industry). The U.S. created enormous capital (e.g. a record 20 consecutive quarters of double-digit corporate earnings growth) and there were massive foreign capital inflows. It was a virtuous cycle of consumption and investment. Cheaper goods and cheaper capital induced demand. Currently, Americans are stocked-up with real assets and goods to weather this recession better than any other country.

U.S. corporations offshored obsolete or high-cost goods, and then imported those goods at lower prices and for big profits. Freed-up U.S. resources were shifted into emerging firms or older products with market power.

One could argue the free market enslaved too many poor people with houses, autos, and "too many" goods. Fortunately, some want to make everything more expensive. So, the poor will no longer be burdened. They can live in apartments, take a bus, or take a hike. It's heathier for them anyway. Who needs the stress of extracting and spending trillions of dollars of home equity, or living in a home without making mortgage payments for a year, until it forecloses?

 
At 2/04/2009 12:45 PM, Blogger misterjosh said...

I gotta say that first chart looks a little scary for the long term. GDP growth has gotten smaller and smaller over the years, and that trend looks to continue.

If GDP growth is important to our economy, uh oh...

 
At 2/04/2009 1:37 PM, Anonymous iamnorth@gmail.com said...

GDP, as an indicator, should be:

1. Understood before being utilized to support opinions about the health of the economy

2. Revised to be more meaningful

3. Used in appropriate context.

It is possible that the nomenclature of economics needs to be revised. Terms like "recession" and "depression" may have been more appropo when global economies were less prevalent. With the increased incidences of outsourcing, off-shoring, and reliance on credit consumers and constituents of an economy can experience, heuristically, "bad times" while ancient measures like GDP suggest "good times".

GDP is a "here and now" calculation. The economy is a trend.

Can anyone point to a current Net Domestic product trend?

http://www.j-bradford-delong.net/movable_type/images2/20050730_wageshare.gif

I threw together a spreadsheet of NDP and the quarter-to-quarter delta, which shows a vastly different economic experience than GDP. Would be happy to email it to anyone who wants to see it. NDP Volatility begins to turn turbulent in the 1970's and has been increasing in volatility ever since -- with some serious contractions.

By the way, NDP is GDP minus depreciation on a country's capital goods.

 
At 2/04/2009 1:53 PM, Blogger bobble said...

well, if we're just going to eyeball a bar chart and make observations, here are two:

GDP growth was stronger after clinton raised taxes than after bush cut taxes.* kool-aid drinkers, start spinning. MP's charts don't lie right?

or how about this?

GDP declined at high rates from 1930-1933. FDR took office in march of 1933, after which, GDP rose at very high rates. FDR caused the depression to get worse? the charts don't show that.

*i'm not against tax cuts. you can certainly make the case that JFK's tax cuts (when the marginal rate was very high) worked. and reagan's cuts probably worked. but bush's cuts were an obvious failure.

 
At 2/04/2009 2:26 PM, Blogger PeakTrader said...

Bobble, how can you conclude Bush's tax cuts were failures based on that information? The 2001 recession turned out to be short and shallow, after the worst stock market crash since the Great Depression (which started under Clinton). Without Bush's tax cut, it could have been a severe recession. Also, the U.S. was on a path to a soft-landing until Sep 2008, while the Bush tax cut coincided with real GDP growth increasing to 2.8% in the second quarter. Without FDR, the depression may have been over after 1933, and Clinton became president after a recession and slow recovery from 1990-93. It may have been a stronger expansion in the mid-'90s without Clinton's tax hike and putting the scare on small businesses with universal health care.

 
At 2/04/2009 3:24 PM, Anonymous Anonymous said...

after the worst stock market crash since the Great Depression

Peekaboo the charts Peak Trader. This secular (it's not structural, for your edification) bear is now tracking GD1 quite closely.

 
At 2/04/2009 8:05 PM, Blogger bobble said...

PeakTrader:"Without Bush's tax cut, it could have been a severe recession. . . . . Without FDR, the depression may have been over after 1933 . . . It may have been a stronger expansion in the mid-'90s without Clinton's tax hike"

Or, it "might" be true that without Bush's tax cut we would have had more prosperity; without FDR, the depression might have worsened; and it might have been a weaker expansion in the mid-'90s without Clinton's tax hike.

since we can't go back in time and replay the scenario, we can never know.

i have to go with the evidence i actually see.

GDP actually increased more after clinton's tax increases than bushs tax cuts (both presidents started with a recession).

GDP actually decreased until FDR took office, then it increased.

proof positive? of course not.

but looking at those GDP charts should make you think . . . perhaps tax cuts are most effective in certain situations, like when marginal tax rates are high (JFK, Reagan?). maybe tax cuts aren't the answer to *everything*.

 
At 2/05/2009 8:13 AM, Anonymous Anonymous said...

Mark needs to break down these data to show the percent of GDP growth supplied by government spending, as well as include a separate histogram to show the increase in government spending throughout this same period. We need better presentation of these data.

 
At 6/19/2009 10:10 AM, Blogger harleyj said...

Reagan's recovery should have been called the OPEC recovery. The price of oil was on the decline when he fought his tax cuts through congress and before the tax cuts ever took effect, the economy was beginning to recover. OPEC caused the Carter/Reagan Recession & OPEC caused the Reagan Recovery. Reagan's 2nd term major tax/fee increases did not result in economic chaos or recession. Reagan's was a rich mans recovery and a major redisribution of wealth from the low and middle income earner.

Neither did GHWBush's tax increases result in chaos. In fact, they eventually sparked the recovery which rolled over into Clinton's first term. Clinton's tax increases did not result in chaos--as promised by Newt. They were exactly the right medicine at the time and resulted in the longest, strongest recovery in US history & the first balanced/surplus budgets since LBJ's last budget--in spite of the false claims by the Republican congress that they cut overall spending. They did not!

 
At 1/09/2010 3:57 PM, Anonymous Anonymous said...

The GDP history is interesting. But when you put it next the the calculated inflation rates from the Bureau
of Labor Statistics. The inflation rate has surpassed
the GDP. Which means that the GDP has been a product not of production output but inflation. Did an estimate of last 20 years. The claim is that the CPI is at 84% over the last 20 years. If you can believe that, it is probably more when you look at things such as healthcare. If we have had 4% growth, which we have not, over 20 years- Then we have 80%. Has the US been deceiving the public when it comes to the GDP? The US has lost industries and jobs. Our economic engine is small
business. Is small business increasing the GDP output. Most likely not.

 

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