GDP Up, But Don’t Look Too Deep

January 27, 2012

http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm

As reported by the Bureau of Economic Analysis this morning, 4th quarter GDP (gross domestic product) accelerated to an annual rate of increase of 2.8% from the 3rd quarter’s pace of 1.8%.  The stock market fell in response.  Why?  Because contrary to the rosy economic news that we got during the 4th quarter – driven by booming holiday sales, this GDP report paints a different picture.  Of that 2.8% increase, most of it – 1.9% – was due to nothing more than increases in inventories, and rising inventories are never a good sign for the economy.  Strip that away and the real increase in GDP falls to a measley 0.8%.  Or, worse, if the increase in inventories results in slowdowns in production driven by inventory control, we could actually see a slowdown in the 1st quarter of this year.

Expressed in per capita terms, the news is even worse, of course.  Take away inventory growth and the per capita rise in GDP falls to zero.  In other words, there’s a very real possibility (or even a likelihood) that the economy has stalled.  Worse yet, federal spending under the American Recovery Act (the “stimulus” plan) is nearly finished.  And now the pentagon is in the process of slashing costs.  Additionally, the cut in payroll taxes is due to expire in a month, and it’s no sure thing that it will be extended; and it’s very unlikely to be extended without corresponding cuts in spending that will pull as much out of the economy as the tax break puts in.  All of this taken together spells big trouble for the economy.  It’s no wonder that the Federal Reserve vowed to keep interest rates at zero for another three years.

For all of these reasons, I stand behind my prediction that 2012 is going to be a bad year for the economy.  The tactic of using debt to mask the effects of the trade deficit has been exhausted and the trade deficit is steadily getting worse.  

The following is a chart of GDP per capita:  Real Per Capita GDP.  Note the convergence of the two lines -GDP per capita with and without stimulus spending – now that the stimulus spending has been virtually exhausted.


Inventory-Building Masks Stagnant 3rd Quarter GDP

October 30, 2010

http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm

The Bureau of Economic Analysis released its first preliminary estimate of U.S. Gross Domestic Product (GDP) on Friday morning.  (Link provided above.)  GDP grew by 2.0%, a marginal improvement over the 2nd quarter final reading of 1.7%.  Inventory-building added 1.44% to GDP.  That’s not good.  Inventories can’t grow indefinitely and, at some point, are corrected with inventory reductions.  Strip out inventory-building and GDP rose by only 0.56% – less than the rate of population growth.

Before going further, I should point out that all of these numbers are dependent on the government’s estimate of inflation, or what they call the GDP “deflator.”  GDP actually rose at an annual rate of 4.2%, but the government estimates the GDP deflator to be 2.2%.  Thus, “real” (adjusted for inflation) GDP rose at an annual rate of only 2.0%.  What if the government underestimated inflation and its effect on the cost of living?  The numbers would show “economic growth” but everyone would be getting poorer.  I point this out just to illustrate how questionable these numbers can be.

With that said, factoring in population growth of about 1% per year, real per capita GDP rose at an annual rate of about 1%, little changed from the 2nd quarter.  With stimulus spending factored out, it actually rose at much more robust pace of 4.5%.  But that’s a technicality, caused by a huge downward swing in stimulus spending from the previous quarter.  As you can see from the following chart, real per capita GDP with stimulus spending factored out has been bouncing up and down (likely due to lags in reporting on stimulus spending), but shows no upward trend.  In other words, the stimulus spending halted a cataclysmic decline in GDP and stabilized it, but there’s no evidence of growth.  And the stimulus spending will soon be coming to an end. 

Real Per Capita GDP

This is why the Fed is so worried about prospects for the economy and is widely expected to start pumping billions more into the economy.  More on that in the next post.


Real Per Capita GDP Declines at 7.5% Rate in 4th Quarter

February 28, 2009

The BEA (Bureau of Economic Analysis) revised its calculation of GDP for the 4th quarter, 2008 GDP yesterday.  Instead of declining at an annual rate of 3.8%, as announced on January 30th, the revised figure is 6.2%.  But GDP alone doesn’t adequately describe what happened to your share of the economic pie. A better measure is “real per capita GDP,” or GDP divided by the population of the U.S. (By the way, the term “real” means that the data is adjusted for inflation.) Since the population of the U.S. grew in the fourth quarter at an annual rate of 1.2% (adding 850,000 people in the 4th quarter), then real per capita GDP declined at an annual rate of 7.5%, from $38,413 per person in the 3rd quarter of 2008 to $37,693 per person in the fourth quarter. This is also the fourth decline in the last five quarters, a string interrupted only by a small rise of 0.45% in the 2nd quarter of last year, thanks to last year’s stimulus package. Real per capita GDP is now lower than the 1st quarter of 2007 when it hit $37,808. And no one expects it to do anything but decline further in the coming months.

It’s the rate at which the economy is deteriorating that’s the most disturbing.  Real per capita GDP declined at an annual rate of 1.5% in the 3rd quarter.  One quarter later, that decline has jumped to 7.5%.  If this rate holds, this recession will cross over from recesssion to depression by the end of the year.  (A depression defined as a decline in real GDP of 10% or more.)  No one is forecasting that this rate of decline will continue, but it wouldn’t surprise me a bit.  Not a single economic indicator is showing improvement, and nothing has been done to address the trade deficit or the explosion in our population.  Until one of both of those happens, the economic outlook will remain grim.


Real Per Capita GDP Declines at Annual Rate of 5.0% in 4th Qtr.

January 30, 2009
The Commerce Department announced this morning that GDP (Gross Domestic Product), the broadest measure of the health of our economy, declined at an annual rate of 3.8%. But GDP alone doesn’t adequately describe what happened to your share of the economic pie. A better measure is “real per capita GDP,” or GDP divided by the population of the U.S. (By the way, the term “real” means that the data is adjusted for inflation.) Since the population of the U.S. grew in the fourth quarter at an annual rate of 1.2% (adding 850,000 people in the 4th quarter), then real per capita GDP declined at an annual rate of 5.0%, from $38,413 per person in the 3rd quarter of 2008 to $37,936 per person in the fourth quarter. This is also the fourth decline in the last five quarters, a string interrupted by a small rise of 0.45% in the 2nd quarter of last year. Real per capita GDP is now lower than the 2nd quarter of 2007 when it hit $38,157. And no one expects it to do anything but decline further in the coming months.

So the question is whether population growth is helping or hurting the economy. Now even I wouldn’t suggest to you that GDP would have been the same without these additional people. Take away those 850,000 people and the GDP would clearly decline too. Every person contributes something to the overall economic activity. Even if all they buy is food, clothing and housing, no matter how rudimentary (even if they rent instead of buy), they are boosting the GDP by that amount. But if they are boosting it by an amount that’s below average, then they are a net drag on the economy, contributing just as much to the labor pool but consuming below the level needed to gainfully employ them. Well, the fact that the percentage of people falling below the poverty line is increasing is clear evidence that population growth is occurring primarily in the bottom half of wage earners, actually hurting the economy in per capita terms.

It all makes sense if you think about it. As we cram more people into the same amount of space, per capita consumption declines while the per capita contribution to the labor pool remains the same or may even grow. (As the over-supply of labor grows, putting downward pressure on wages, a higher percentage of the population will enter the work force in a bid to keep up the family’s income.) If you don’t understand the relationship between population density and per capita consumption, then you need to read Five Short Blasts.

It’s time for economists to abandon GDP in favor of a more meaningful economic indicator, one that takes the size of the population into account. Even a child can understand that a bag of jelly beans shared with three kids instead of two means fewer jelly beans for himself. Economists need to look not just at the growth in the supply of jelly beans, but also at how many kids are showing up to share them.

 


Real Per Capita GDP Falls 1.5%, Recession Now One Year Old

November 26, 2008
Yesterday, November 25, the Bureau of Economic Analysis announced that real GDP* in the 3rd quarter fell at an annual rate of 0.5%, worse than its preliminary estimate of a decline of 0.3%.  But GDP is a meaningless figure if it’s not related to the size of our population. Since the U.S. population is steadily rising at an annual rate of about 1%, then the GDP pie has to be sliced into more pieces. If the pie isn’t growing faster than the population, then everyone gets a smaller piece. In other words, the effect on individual Americans is even more pronounced than raw GDP data would lead us to believe. In the 3rd quarter of 2008, real per capita GDP fell by 1.5% to $38,412 per person (adjusted for inflation and expressed in 2000 dollars). That’s a decline three times as bad as the government’s raw GDP data.

This is the third quarterly decline in real per capita GDP in the last four quarters. Only the second quarter of 2008 had a small gain of 1.8%, thanks to the fiscal stimulus package. Real per capita GDP is actually lower than it was in the 3rd quarter of 2007. And all experts agree that the 4th quarter of 2008 will be much worse.  Since real per capita GDP is a much better gauge of how the economy impacts individual Americans, I use this for my definition of a “recession.”  By this definition, America has now endured a full year of recession, and it promises to get much worse.

The trade deficit continues to be a huge drag on real per capita GDP. Were it not for the trade deficit, 3rd quarter real per capita GDP would have been 6.0% greater at $40,733 per person. (Imports are a subtraction from GDP in the BEA’s calculation.) If the next president is looking for a way to turn the economy around, the trade deficit would be a great place to start.

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* – Annualized 3rd Quarter Actual GDP, expressed in current dollars, was $14.420 trillion, compared to $14.295 trillion in the 2nd quarter.  However, “real” GDP, which is adjusted for inflation and expressed in 2000 dollars, was $11.712 trillion, compared to $11.727 trillion in the 2nd quarter.


Real Per Capita GDP Falls 1.2%

October 31, 2008
The Bureau of Economic Analysis reported Thursday that 3rd quarter real GDP* fell at an annual rate of 0.3%. But GDP is a meaningless figure if it’s not related to the size of our population. Since the U.S. population is steadily rising at an annual rate of about 1%, then the GDP pie has to be sliced into more pieces. If the pie isn’t growing faster than the population, then everyone gets a smaller piece. In other words, the effect on individual Americans is even more pronounced than raw GDP data would lead us to believe. In the 3rd quarter of 2008, real per capita GDP fell by 1.2% to $38,438 per person (adjusted for inflation and expressed in 2000 dollars). That’s a decline four times as bad as the government’s raw GDP data.

This is the third quarterly decline in real per capita GDP in the last four quarters. Only the second quarter of 2008 had a small gain of 1.8%, thanks to the fiscal stimulus package. Real per capita GDP is actually lower than it was in the 3rd quarter of 2007. And all experts agree that the 4th quarter of 2008 will be even worse.

The trade deficit continues to be a huge drag on real per capita GDP. Were it not for the trade deficit, 3rd quarter real per capita GDP would have been 6.0% greater at $40,733 per person. (Imports are a subtraction from GDP in the BEA’s calculation.) If the next president is looking for a way to turn the economy around, the trade deficit would be a great place to start.

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* – Annualized 3rd Quarter Actual GDP, expressed in current dollars, was $14.429 trillion, compared to $14.295 trillion in the 2nd quarter.  However, “real” GDP, which is adjusted for inflation and expressed in 2000 dollars, was $11.720 trillion, compared to $11.727 trillion in the 2nd quarter.