GDP growth, Nov 2007

Increasing exports helped increase the BEA's estimate of third quarter GDP growth to 4.9% (from last month's estimate of 3.9%).  This should keep the debt clock (%GDP) ticking backwards. 

 

I wonder which politician will be the first to discover that good news.  One would think that those politicians feigning alarm at our "ballooning national debt" would now be happy to balance by pointing out our "faster-ballooning national economy" and our consequent "deflating national debt burden"—wouldn't one?  (I'm thinking of the same politicians who, when exports are rising, talk of the "plummeting dollar"—but when the dollar is rising, talk of the "ballooning trade deficit."  The ones who are hoping for a recession, but can't admit it openly.) 

Anyway, enjoy the backwards-ticking debt clock while it lasts.  Most GDP-watchers are expecting a Q4 slowdown, which in turn would at least slow down the rate at which it's decreasing.

Comments

[Kevin]

It's 4.9 not 5.9 for the real GDP -- anyway I watch CNBC every morning and then usually listen to it on Sirius as I'm driving to work. What's hilarious about this is that seemingly every day back then, during the 3Q, pundits were yapping about how the U.S. was ALREADY in a recession -- it was absolutely the conventional wisdom.

One day some positive data release caused a guy to assert that the 3qd Q GDP would be 3% growth -- that sounded shocking at the time, and he was completely forgotten the very next day when other events brought everyone back to the recession talk.

[Kevin]

It's 4.9 not 5.9 for the real GDP -- anyway I watch CNBC every morning and then usually listen to it on Sirius as I'm driving to work. What's hilarious about this is that seemingly every day back then, during the 3Q, pundits were yapping about how the U.S. was ALREADY in a recession -- it was absolutely the conventional wisdom.

One day some positive data release caused a guy to assert that the 3qd Q GDP would be 3% growth -- that sounded shocking at the time, and he was completely forgotten the very next day when other events brought everyone back to the recession talk.

[Steve Dalton]

Thanks for the analysis. I linked back to you on my morning round-up of "good news" in real estate.

I'm a bit ticked that the media and politicians are working so hard to make a vacation market housing problem into a nationwide housing recession.

[Steve]

Kevin: Thanks for catching that typo; it's fixed.

[Mike H]

I don't know how much I would call the 4Q a slowdown, especially since you like the two quarter averaging method. The reason 4Q will be less than this is basically an accounting artifact that made its way into 3Q. If it instead fell into 4Q, both quarters numbers would appear more consistent (and each very good numbers). Either way, the economy is still booming, and I don't think it's loosing much momentum yet.

[woodchuck64]

With all this good news, I guess Bernanke will be raising the Fed rate Dec 11, eh?

It seems more likely 4Q will be barely above zero and a 2008 recession will only be averted if dramatic Fed rate cutting somehow fixes the credit crunch. But the last dramatic rate cut wasn't that effective, as can be seen by the LIBOR rates and credit spreads in the last few weeks, and one can imagine this next one will be fairly impotent as well.

[Bob]

Inventories spiked up contributing about 1% of the growth. That's good if they work their way through the supply chain quickly. Not so good for profits if they have to be moved
by heavy discounting. We'll see.

I'm not sure what the Fed's track record is on forecasting GDP. Their latest take, while in positive territory, is not all that robust.

This Goldilocks thing seems to have caught people's fancy though a persistent continuance won't help your granddaugter.

[Grodge]

Two points:

1. As Barry Ritholz has been persistent on, the stats from the BLS are "fanciful."

"Let's begin with what we know about Q3 prices: They saw significant increases -- yet the price index deflator was a 9 year record low of 0.9%. Rex Nutting observed: "Because of the way in the price index is constructed, it likely understates real-world inflation, and thus overstates real growth."

Residential fixed investment, the GDP component that includes spending on housing, plunged by 19.7% in the third quarter (but Investments in structures increased 14.3%).

Profits for the 3rd quarter flipped negative, dropping 8.5%.

We have seen consumer spending falter, with the crucial opening salvo of the holiday weekend down 3.5%. That's no surprise, given that second-quarter wages were revised lower by $44.8 billion. As a result, real disposable incomes fell 0.8% in the second quarter, instead of rising 0.6% as the Commerce Department had previously reported."

http://tinyurl.com/yvslme

2. Steve, what is with your obsession over "what politicians say"? You say, "I wonder which politician will be the first to discover that good news." Who cares what they say or don't say about this stuff? Politicians have been conditioned to say whatever will get them elected, and they will never give credit to anyone but themselves for any perceived beneficial effect, and they will always "feign alarm" over all manner of suppposedly scary outcomes (Reference: Global War on Terror, Iraq Nukes, Hillarycare, etc, etc.) That goes for Republicans, Democrats, John Edwards, George Bush, Ted Kennedy, Ronald Reagan and William Jennings Bryan. The readers of this blog seem intelligent enough to understand that, so why is that pertinent to the conversation?

[Steve]

Grodge:

The reason is pretty simple: politicians are still getting away with half-truths and false alarms, by craftily disguising them as "economic truths." Unfortunately, nobody is calling them on it yet, in spite of how easy it is these days to expose their rhetorical gambits and straw men.

You seem to want to shrug it off; after all, politicians haven't changed in that regard for at least the 2400 years since Plato started laying into them. But today, it's easier and faster to check their assertions, and easier and faster to communicate to a wide audience. That's why I've chosen not to shrug it off as you apparently have.

As soon as journalists or legitimate audiences (as opposed to plants and shills) are permitted to begin exposing the gambits via embarrassing follow-up questions, I'll start to feel as if the information age is at last starting to do some good in the political arena. I look forward to the day when politicians are forced to revise their opinion of how stupid and gullible their audiences are. Obviously, that day hasn't arrived yet; inane dogma still works like a charm.

That's a hot button for me, and readers should expect to continue hearing about it here -- should they choose to continue visiting this blog.

[Grodge]

Steve,
I appreciate you optimistic perspective, I'm just stunned that you take this GDP number at face value.

If the 4.9% number is to be considered unquestioningly, without any caveats, then the economy is absolutely perfect. I guess I should mortgage my house, leverage my brokerage account and put every dime into XLF, JPM and Citigroup stocks, since these shares have taken such a beating on such irrational fears.

The fact is that most discerning individuals who manage risk have a strong suspicion of this GDP number-- and for good reason.

Pursuing the true economic facts seems more germane to the GDP issue than tweaking demagogic politicians for playing their historic role in the grand drama.

[Steve]

Grodge:
I have never asserted that government numbers are perfect, GDP included. One commitment I made to myself long ago, however, was to use "official" government sources when possible (and when I can find them). There's been an army of smart people behind the BEA statistics for decades; that of course does not guarantee that every number they put out is the best number possible; but sticking with their numbers when possible does guarantee that I won't have to add qualifications such as "...just trust me on this, because Barry Ritholz and Grodge assured me that the BEA's numbers are crap, and I trust them."

If you and Barry want to take up the challenge of getting the BEA to mend its methods, feel free. I'd welcome increased accuracy from federal agencies. [And if you're feeling especially ambitious, get them to give us a household-income-quintile breakout of real disposable income per capita -- because that would advance the accuracy of the income distribution debate by a light year.]

[Syphax]

Grodge,

Although I don't see any point in mentioning it at the big picture site(most of the people there have already made their mind up, the economy sucks and the data is only right if it proves this) Theres a pretty good reason why the GDP deflater was only 0.9%.

A 14.8% drop in energy prices during that 3 month period ends up making headline CPI come in at 1.0%. In other words, the deflater was so low because headline WAS that low during the 3 month period.

Funny that Ritholtz only cares about energy prices when they go up. If they go down he apparently completely ignores them.

CPI data : http://tinyurl.com/2k9myv

[JorgXMcKie]

Until CPI somehow incorporates technological advances in a way that makes sense, I'll continue to believe that it overstates inflation rather than understates it.
I once asked (perhaps here) for someone to give me a few examples of goods that cost more today in real terms than 100 years ago, while simultaneously allowing for technological advances. (I.e. housing may cost more, but modern houses have value in ways unavailable 100 years ago. Health costs are higher but we have treatments totally unavailable 100 years ago.) Anyway, the example given was bread. In real terms it's quite a bit more expensive. I then asked how many loaves of bread could be bought with the average hourly pay rate in 1907 compared to today.
In other words, I'm going to continue to avoid using CPI for most comparisons. Quarter to Quarter they may mean something. Year-to-year I'm not so sure, and decade-to-decade seems pointless.

[JorgXMcKie]

Oh, and I have a serious question for Grodge. Do you or Ritholz or anyway have a restated CPI change for the past couple of decades or so? I'd like to compare something like that to the BLS figures and match up some other events.
For instance, what does such a revised chart show compared to known (or at least verified or something) recessions?

[Bob]

I ran in to someone that has a fairly senior position in one of the very large trucking companies. Business this quarter to a mega big box discounter is down by a third.

Seems they are running inventories way down before replinishing. Now that could be due to smarter supply chain management or it could be that the big box guys are not all that optimistic of this holiday season. It's not due to competition because the contracts were set a long time ago.

[marmico]

Syphax, FYI,

The GDP implicit price deflator is a different index than the CPI. The headline deflator was 0.9%, but the gross domestic purchase deflator was 1.6%. Both price deflators seem low in a historical context.

See Table 4:http://tinyurl.com/2evf5z

Otherwise, it is a blockbuster report but old news. It seems likely there will be payback on the Q3 inventory build in Q4, PCE was flat in October, durable goods orders were also down, commercial construction has turned down as the credit crunch spreads, government may add less as hiring freezes and layoffs accelerate with the decline in state/local tax receipts.

The consensus estimate is 1.5% real growth in Q4. If that holds the 2 quarter average will be above trend growth.

[woodchuck64]

"Theres a pretty good reason why the GDP deflater was only 0.9%. A 14.8% drop in energy prices during that 3 month period ends up making headline CPI come in at 1.0%. In other words, the deflater was so low because headline WAS that low during the 3 month period."

This isn't the whole story. Import prices of oil surged in Q3 and *that* contributed more to the decrease in the inflator than anything else. See Rex Nutting's marketplace article on this at
http://tinyurl.com/34nsb4

A decrease in inflation due to rising oil prices makes little sense to me, except in vague accounting terms, so we should expect a correction in the next quarter if oil prices fall and/or domestic prices rise.

[Grodge]

Steve,
I'm not implying that the BEA numbers should not be used, but at least recognize their limitations.

As Ethyl's reference to Rex Nutting's piece shows, the quarterly numbers can have aberrant inferences even though he accounting is technically accurate.

Just saying "Yep, it's 4.9%, that settles it" seems a bit presumptuous. Next quarter's comparisons are sure to be wicked and the GDP number promises to be horrendous. One quarter does not a Goldilocks make. The effects of the specious deflater and the higher inventories will surely rear their ugly heads-- and you know it. Celebrate the 4.9% number all you want, but some caveats are in order.

[Syphax]

"The GDP implicit price deflator is a different index than the CPI. The headline deflator was 0.9%, but the gross domestic purchase deflator was 1.6%. Both price deflators seem low in a historical context."

Yes but the argument Ritholtz was making was that inflation has been much too high for the 0.9% deflater to be true and therefore it isn't. He ignores the fact that during the 3rd quarter inflation was indeed tame even if only temporarily.

"This isn't the whole story. Import prices of oil surged in Q3 and *that* contributed more to the decrease in the inflator than anything else. See Rex Nutting's marketplace article on this at"

Since the deflater measures domestic prices he is correct... but I don't see anything wrong with the number. If CPI went up only 1% then consumers only faced a 1% inflation rate. If higher oil prices will been seen by consumers in the 4th quarter this will be reflected in 4th quarter CPI and the GDP deflater as it should be.

[marmico]

Syphax, it is not my intent to belabor the gdp deflator, other than to repeat myself and say that it appears low in a historical context.

http://www.economagic.com/em-cgi/data.exe/fedstl/gdpdef+1

One would have to to go back to Q2.1998 and Q2.1997 to find a lower deflator. And then, back three decades to find another equivalent. It does seem like an anomaly, no?

BTW, the NIPA report of November 30 casts a chilling light on Q2.2007 labor income; at least Floyd Norris says so.

http://tinyurl.com/25a2bn

Nominal wage/salary income downgraded from 4.5% annualized to 1.6% annualized.

Just another anomaly, right?

[A Tanatar]

Ethyl Added, thank you for the link. I think the article, pretty much, implies that inflation as reported is really a measure of price increase due to domestic factors only. Therefore, I think that it would be inaccurate to use it as a deflator for household income, especially with the change in the import structure of the country.

[Kevin]

Ethyl that's a priceless link to the Rex Nutting article, because it shows how he doesn't understand this issue of the GDP deflator.

GDP only measures the gross DOMESTIC product, and so the the GDP deflator does exactly what it's supposed to do -- correct for changing prices of DOMESTIC goods and services, things made in the U.S.

If you want to measure real output of U.S. goods, you shouldn't be applying inflation specific to imports to that: if you did you'd get an incorrect value. (I recall an economist saying it like this: The GDP deflator does not respond to import prices.)

SO the GDP deflator is NOT an economy-wide guage of inflation, as Nutting seems to think it is supposed to be. We have the CPI for that, more or less; the GDP deflator has another role. Just as, the GDP is not an all-inclusve guage of our financial well-being -- it's a measurement of US production of goods and services.

His specific claim that GDP is overstated due to rising import oil prices coincident with falling domestic gasoline prices is particularly off-base.
("Imported prices for energy rose, but domestic prices didn't")

Should be obvious this precisely means the value of U.S. refining of oil actually declined -- meaning domestic output of that activity FELL, which DETRACTS from GDP. It doesn't artificially inflate the GDP in the government's numbers, as Nutting thinks; just the opposite, it drags down the reported GDP, all else being equal.

[woodchuck64]

Kevin,

The way I understand this issue is that there is a disconnect between import oil prices and domestic gasoline prices. There is reduced demand for gasoline, but oil imports are not falling (as much as gasoline demand). Maybe this is because oil companies expect demand to pick up. But the disconnect can't last: either oil prices will fall or gasoline prices will rise. When that happens, the deflater will swing the other way, causing a loss in GDP equal to its gain in 3Q. It is not clear to me how the deflater can be accurate at inflections points such as this.

[Kevin]

"When that happens, the deflater will swing the other way, causing a loss in GDP equal to its gain in 3Q."

If imported oil prices fall, rise, or stay the same, that will have no affect on the deflater, because that is not a domestic product.

If domestically-refined gasoline prices rise, then yes that would tend to push up the deflator estimate of inflation. But that still has zero impact on last quarter already reported and says nothing about its accuracy -- the GDP report does not try to predict the future.

At best this situation may be a leading indicator of what to expect in the future (like seeing inventories suddenly building up in an industry)-- but it says nothing about the accuracy of the report for last quarter, as Nutting thinks.

It may not even be a good indicator though, as this issue is just one variable in a big sea of variables, and the relationship between refined gas and imported oil isn't necessarily that rigid. Sometimes industries have to eat costs and suffer lower profits, sometimes for years.