July 31, 2003

Yes! Good GDP News!

Yes! The second quarter (April-June) showed significantly faster real GDP growth than I (and everybody else) had been expecting: GDP grew at a 2.4% per year annual rate (meaning that second-quarter real GDP was 2.4%/4 = 0.6% higher than first-quarter real GDP.

Now IIRC, average hours worked were down 0.2% in the second quarter vis-a-vis the first quarter, and employment was down in the second quarter by 0.2%, meaning that Americans worked 0.4% fewer hours in the second quarter than the first quarter--that labor input shrank at a 1.6% per year annual rate.

Combine a 2.4% per year rate of growth of real GDP with a -1.6% per year rate of growth of labor hours, and you have a 4.0% per year rate of growth of labor productivity. That's a very impressive number for the long run. But in the short run it drives a big wedge between the (relatively good) production news and the (relatively bad) employment news.

GDP growth accelerates in 2Q - Jul. 31, 2003: Gross domestic product (GDP), the broadest measure of economic activity, grew at a 2.4 percent annual rate in the quarter after growing at a sluggish 1.4 percent rate in the first quarter, the Commerce Department reported. Economists, on average, expected GDP growth of 1.5 percent, according to a Reuters poll.

It was the strongest showing for GDP since a 4 percent growth rate in the third quarter of 2002. The news, together with a Labor Department report showing another week of falling claims for unemployment benefits, helped lift U.S. stock market futures. Treasury bond prices reversed earlier gains. Most of the second-quarter increase in GDP was due to a 3.3 percent pace in the growth of consumer spending, which makes up more than two-thirds of the total economy.

Also supporting GDP growth was a 25.1 percent gain in the pace of federal government spending, the biggest gain since 30.3 percent in the first quarter of 1967. That spending growth was mostly due to a 44.1 percent jump in defense spending, the biggest gain since a 110 percent gain in the third quarter of 1951...

Pet peeve: Why can't reporters keep their minds focused that what they are writing about are quarter-to-quarter changes, measured as annual rates of growth. They write: "That spending growth was mostly due to a 44.1 percent jump in defense spending, the biggest gain since a 110 percent gain." That's not what they mean. What they mean is that second-quarter defense spending was 11% higher than first-quarter defense spending, and the 44% is a "if this went on for a whole year" number. (Actually, it isn't: they don't compound growth rates. But I'm not going there.) What they mean is that the biggest jump in the past was a 27.5% jump in defense spending from quarter-to-quarter--which, if it were to continue to grow at that same pace, would in a year lead to a 110% jump...

Posted by DeLong at July 31, 2003 11:46 AM | TrackBack

Comments

Keep in mind that this is the initial 'flash' report. The flash estimate is reported a month after the end of the quarter, with a revised number being reported (I believe) thirty days after that. Quite often, there is a substantial difference between the flash estimate and the revised number; in this case, since the flash number was so much higher than expected, I would think any revision would be downward.

Posted by: Steven J. Berke on July 31, 2003 08:00 AM

"It was the strongest showing for GDP since a 4 percent growth rate in the third quarter of 2002." Is this sustainable? Interest rates are going up - the exploding deficit funding will soak up a lot of money; oil is still $30/barrel with Iraqui oil production consistently lagging administration predictions.

BTW: Prices of raw materials are also going up while U.S. manufacturing is not expanding - China is growing at nearly 10% and guess where they will be sending it all?

Posted by: claude tessier on July 31, 2003 08:51 AM


Regarding the 'pet peeve' Professor DeLong mentions, I would be considerably more inclined to blame reporters for their ignorance or sloppy writing were it not the case that the Department of Commerce seems to have stated the numbers in a way that lends itself to this interpretation. Based on the text of the press release, I'm not certain that I would have drawn a different conclusion:

"Real federal government consumption expenditures and gross investment increased 25.1 percent in
the second quarter, compared with an increase of 0.7 percent in the first. National defense increased 44.1 percent, in contrast to a decrease of 3.3 percent. Nondefense decreased 4.1 percent, in contrast to an increase of 8.4 percent. Real state and local government consumption expenditures and gross investment decreased 1.5 percent, in contrast to an increase of 0.2 percent."

(from http://www.bea.gov/bea/newsrel/gdp203a.htm)

One can certainly argue that financial reporters should know the conventions for these reports or check them before writing, but despite my Econ degree from Berkeley, I initially made the same mistake.

Posted by: Robert on July 31, 2003 09:11 AM

The GDP data are encouraging. I'd guess that restocking of armories will continue for another quarter or so, so that the big contribution of defense spending to GDP (contributing 1.7% of the 2.4% total rise) won't collapse all at once. The inventory decline (subtracting 0.8% from GDP for a second quarter in a row) offers hope that inventory accumulation will support Q3 growth (even though the Beige Book reports inventories are still too high). Spending on consumer durables and equipment and software were also encouraging.

Brad,

Reporters use the 44.1% figure because that is what is reported to them. The 44.1% figure is an annualized figure, not a 4x11%. Like it says at the bottom of the table I'm looking at:

Source: U.S. Commerce Department, http://www.bea.gov.

Reporters would have to work backward to get the quarterly change in military spending. By using the 44.1% figure, they maintain consistency with the 2.4% headling growth figure, which, as you know, is also annualized.

There is a convention among business journalists (I think) which uses the terms "pace" and "rate" to talk about annualized rates of change, without actually telling us every time that the figure is annualized. I suspect you are right that reporters are sometimes led to make (and write down) logical errors as a result of getting lazy in the use of this convention. You see the same kind of misinterpretation often from reporters writing about sales. They often say sales have slowed when they really mean growth in sales has slowed - sales actually rose.

Posted by: K Harris on July 31, 2003 09:32 AM

Oops, sorry Robert. Your post wasn't there when I opened the paged.

Posted by: K Harris on July 31, 2003 09:39 AM

Looking at the numbers in their component parts, I get a weird feeling...there are lots of big jumps but also lots of numbers that don't jump, possibly leading to problems down the road.

(all #s in chained dollars)

A $56 billion rise in total GDP...$55 billion rise in consumption...$53 billion rise in durable goods, concentrated in cars, getting us back to where we were in 3Q02 in that category. Is spending on autos really ready to take off? I thought they were still having trouble getting vehicles off the lot without massive discounting.

Flat non-durable spending. $14 rise in services concentrated in health care and housing -- that makes sense actually.

Investment basically flat (small rise), still below where we were in 4Q98. Good rise in computers, but offset by drop in change in private inventories. Ok, so inventories are low...is that b/c of the fluid supply chain or because demand is picking up? Is the computer replacement cycle beginning anew? Some modest optimism I guess.

Then...ugh. It gets ugly. Trade deficit -- all time high. Drops in exports across the board, goods and services. Huge rise in goods imports, all time high. According to these latest figures, exports make up just 10.9% of GDP. It hasn't been that low since 1995, and has dropped from an all time high of 12.6% in 3Q00. Imports up to 1/6 of GDP. ONE SIXTH! That's not an all time high (17.1% in 3Q00), but getting close.

Government spending -- big jump in (surprise!) National Defense. It now makes up 4.7% of GDP, highest since 2Q96. Overall government spending is 18.4% of GDP, highest since 3Q95.

Incidentally, I might also add that consumption has now crossed the 70% of GDP barrier. So consumption still "trucking" (forgive the pun), investment picking up but still languid, huge trade deficit, drop in exports, and huge defense spending. UNBALANCED!

chuy

Posted by: Chuy on July 31, 2003 10:13 AM

I'm the reporter in question. Ordinarily, I make sure to report these things as annualized rates. In this particular case, I either forgot to include that information, in my haste to get the story up in time, or the qualifiers were edited out at the copy desk for the sake of brevity -- as has happened more than once.

In any event, the story has been corrected and will be re-posted shortly (at or before 2:00 PM ET), at http://money.cnn.com/2003/07/31/news/economy/gdp/index.htm.

Thanks for keeping us on our toes.

Posted by: Mark Gongloff on July 31, 2003 10:41 AM

I'm hardly an expert, but reading these numbers, it looks to me like short-term things are OK and improving a bit, but the long-term economic imbalances and malinvestments remain intact...overcapacity, poor employment growth, wage stagnation, etc.

My amateur read on this is that 3Q should be OK, but with rising interest rates killing the bond market and the refi boom, that this boost of growth will not be sustainable.

Does this make sense to the real economists here?

Love your site, Brad. This is great stuff and I've learned a lot here.

Posted by: FDRLincoln on July 31, 2003 10:42 AM

I'm the reporter in question. Ordinarily, I make sure to report these things as annualized rates. In this particular case, I either forgot to include that information, in my haste to get the story up in time, or the qualifiers were edited out at the copy desk for the sake of brevity -- as has happened more than once.

In any event, the story has been corrected and will be re-posted shortly (at or before 2:00 PM ET), at http://money.cnn.com/2003/07/31/news/economy/gdp/index.htm.

Thanks for keeping us on our toes.

Posted by: Mark Gongloff on July 31, 2003 10:45 AM

Chuy, How do you get spending as % of GDP at 18.4%? 2003 estimate is $2.2 trillion outlays on $10.7 trillion GDP or 20.5%. 18.4% of GDP would imply a $12 trillion GDP.

Posted by: bakho on July 31, 2003 10:45 AM

Well, we have a bear market in bonds. The yield on the 10 year treasury has risen from 3.11 to 4.48 since June 13. The yield is still low in historical terms and hopefully will have no dampening effect on growth, but the rise is surely dramatic.

Posted by: anne on July 31, 2003 11:14 AM

http://epinet.org/content.cfm/webfeatures_econindicators_gdppict

"For the first time in almost three years, business investment shows signs of recovery. After declining for nine out of the last 10 quarters, business investment grew by 6.9% in the second quarter, after a decline of 4.4% in the first quarter. This is the highest growth rate of business investment since the second quarter of 2000. Investment in equipment and software, which fell for the first time in a year in the first quarter of 2003 grew again by 7.5% last quarter. And investment for structures grew for the first time in almost two years as it climbed by 4.8% in the second quarter after six straight quarters of decline."

This is a good sign indeed. The question now is whether growth will become strong enough for corporations to create enough jobs to cut the losses since March 2001. Productivity has stayed high through this period, and so growth has to be sustained above 3 or 3.5% for job growth to be ample.

Posted by: anne on July 31, 2003 11:50 AM

Seems to me that considering employment is still down that this GDP growth comes mainly from belt tightening and increased effeiciency. That's all well and good, but there's a limit to how much of that can be done. For me to be convinced the economy is really on its way to recovery, I'll have to see job growth.

Posted by: Lavoisier1794 on July 31, 2003 11:52 AM

Actually, if productivity were to continue to grow at a 4% rate we will need GDP growth of about 5% for a sustained period to cut past job losses. Productivity growth really has been terrific for such a slow GDP growth period.

....

NYTimes
7/31/03

"Military spending shot up at a 44.1 percent annual rate in the second quarter, the biggest quarterly increase since the third quarter of 1951. In the first quarter, military outlays fell by 3.3 percent.

"The increase in military expenditures was a big reason why federal spending rose by 25.1 percent during the period, the biggest quarterly gain since 1987.

"Despite continuing operations in Iraq and Afghanistan, which have a combined cost of about $5 billion a month, analysts said the economic boost from military spending was not likely to be repeated in coming quarters.

http://www.nytimes.com/2003/07/31/business/31CND-ECON.html?hp

Posted by: anne on July 31, 2003 12:21 PM

Gosh!

It's summertime and the living is easy. There's an awful lot of 'hot money' in motion today too...

I'm just about ready for that double-dip Brad was tempting me with LAST summer myself--in a sugar cone. With sprinkles. Please.

('Play along' http://www.j-bradford-delong.net/movable_type/2003_archives/001860.html with we for a minute here, guys ;-)

After the sound and the fury of the gold rush subside, the fundamental things apply. As time goes by, the mortgage refinancing frenzy is fading (along with the long bond and housing starts). Whatever (domestic) good that was going to do has been pretty much done. The recent tax cuts' REAL WORLD "stimulus", such as it is--

("About $12 billion," according to Treasury. See: http://www.fms.treas.gov/news/press/child_tax_credit2.html )

--will be spent over the next couple of weeks. THEN we'll be back to fundamentals...

Take a good 'long' look at ANYBODY'S graph of the Dow over the last century or so.

(This works for me: http://finance.yahoo.com/q?s=^DJI&d=c&k=c1&a=v&p=s&t=my&l=off&z=m&q=l .)

Compare what you find there with the 'public debt' over a similar period (you're on your own). Now, set yourself up a spreadsheet with THOSE two data sets and ONE more series: the Current Accounts data for a similar time period.

(Hint: you can probably get those numbers somewhere around here: http://www.bea.gov/bea/di1.htm )

When you're done downloading that stuff and your spreadsheet is all set up and you're sitting there pondering the deeper meaning of all those bubblicious graphs, ask yourself:

WHO'S marketing all that paper?

Who's buying it?

With WHAT?

WHY?

AND (taaa daaaa ;!) WHO's business IS that?

Brad's covered the 'real world' implications of Federal budget deficits pretty thoroughly recently. The thing he doesn't talk much about, the thing NOBODY talks much about, is that OTHER deficit: The TRADE deficit. You can learn more than you probably want to know about THAT scam here:

Notes on the U.S. Trade and Balance of Payments Deficits

Wynne Godley

http://www.levy.org/docs/stratan/stratan.html

THEN, of course, there's ANOTHER debt nobody seems to be much interested in too...

In Hock to the Hilt

"We're Addicted To Debt. We Borrow, our businesses borrow, our state and federal governments borrow. Most of the attention is focused now on the federal budget deficit, which could reach an astonishing half-trillion dollars next year. The overall national debt could almost reach its congressionally mandated limit of $7.4 trillion. State governments, most of which are required by their constitutions to balance their budgets, will have combined deficits of an estimated $70 billion next year. As bad as all of that is, the most troubling burden of debt plaguing this country rests squarely on consumers.

Consumer debt is on the rise, and personal bankruptcies are skyrocketing. Reports show that consumer credit increased 5 percent in May, to $1.76 trillion, and household debt now stands at 110 percent of annual disposable income, up from 76 percent in 1986...."

http://www.usnews.com/usnews/issue/030721/opinion/21dobbs.htm

Guess who's 'handling' MOST of THAT 'business'.

That's right: 'Organized Money'.

(See: http://faireconomy.org/commonwealth/reviews.html ).

The VERY SAME people (many of them) who engineered those OTHER 'intelligence failures' (911 & Iraq to name just two) we've been suffering since 'the Supremes', in their infinite wisdom, 'blessed' us AND the world with the current administration*....

(Small world. Ain't it <];?)

Posted by: Mike on July 31, 2003 12:32 PM

If this were a normal recovery, this would be good news. But this "recovery" is being fueled by massive deficit spending on the military and on tax cuts for the wealthy. Neither of those have much multiplier effect on the general economy.

According to Greg Robb at CBS Marketwatch, "Second-quarter GDP growth was well above Wall Street's expectations for a 1.5 percent pickup. Excluding the defense buildup, the U.S. economy grew at a modest 0.7 percent annual rate."

If the general economy is this weak, and long interest rates are headed higher, this will prove unsustainable.

Posted by: Charles on July 31, 2003 12:54 PM

The debt numbers would be more horrifying if we had reason to believe the debt run up was not accompanied by a corresponding run up on the asset side of the national balance sheet. But it was: housing, durables, and the corporate investment boom of the 1990s, which surely has had some role to play in the productivity story. Ditto the private foreign debt and the capital account surplus: you can't prevent foreigners from buying into a successful economy, especially when their own are in the doldrums. (The public foreign debt I do feel squeemish about.)

The one thing that gives me pause is the data on hours worked, which I suspect are pretty soft. While some are out of work, I bet the data misses those of us who worked longer hours because our employers were not ready to hire new workers.

Posted by: Jim Harris on July 31, 2003 12:59 PM

If this were a normal recovery, this would be good news. But this "recovery" is being fueled by massive deficit spending on the military and on tax cuts for the wealthy. Neither of those have much multiplier effect on the general economy.

According to Greg Robb at CBS Marketwatch, "Second-quarter GDP growth was well above Wall Street's expectations for a 1.5 percent pickup. Excluding the defense buildup, the U.S. economy grew at a modest 0.7 percent annual rate."

If the general economy is this weak, and long interest rates are headed higher, this will prove unsustainable.

Posted by: Charles on July 31, 2003 01:04 PM

The worry about the lack of American saving and the resulting balance of payments debt is that Americans have less and less claim to investment income, foreign citizens have more claim to American investment income. We should be saving and lending to other countries. This is no immediate concern, but it is a big big concern.

We are close to zero combined private and public saving. The balance of payments deficit is great and will be greater. No, no, a long term problem. This is part of the long term fiscal mess we are in.

Anne

Posted by: anne on July 31, 2003 01:19 PM

Robert is right about this 25% increase in Federal spending being bad math. But this statement appears to be in the BEA description of their numbers. It's still wrong, however.

I agree with Chuy that looking at the details of spending growth paints a bleak picture. Yes, consumer demand keeps onrising. Residential investment demand also grew but will that last? Busines investment demand is simply noisy and I can see no particular reason why one would think this is about to take off at least from the past trend. But then Dr. Greenspan keeps make his interesting case for optimism. Two things strike me as bad news. Net exports are very negative and fell even lower. And much of the increase in aggregate demand came from defense spending. The pacifist in me hopes this will reverse. The classical economist in me also hopes this will reverse albeit the Keynesian in me is going "oh, no".

Finally a question for Dr. DeLong and his labor productivity math. Production rises by 2.4% per year and labor hours grow by 1.6% per year. Don't we take the difference and not the sum to figure out productivity growth? More likely, isn't it the growth in production minus the growth in productivity that gives the increase in employment demand? Simply put - I puzzled by what you were trying to say here?

Posted by: Hal McClure on July 31, 2003 01:33 PM

Hal, You overlooked the minus sign on the labor growth. Labor decreased by 1.6%. So labor growth was -1.6%. 2.4 - (-1.6) = 4

It seems with that much deficit spending, there should be some rise in the economy. Since the deficit is not a problem in the short term, Mr. Bush can keep cutting taxes until the economy really zips along.

Posted by: bakho on July 31, 2003 01:55 PM

BTW: Prices of raw materials are also going up while U.S. manufacturing is not expanding - China is growing at nearly 10% and guess where they will be sending it all?

http://www.morganstanley.com/GEFdata/digests/20030731-thu.html

---
Will exporters of natural resources consume more or will they use the surplus income to accumulate assets in the developed world? The answer to this question will determine relative asset prices and the resulting trade balances. If natural resource countries continue to accumulate US-dollar based assets, the dollar will be strong and the US trade deficit large, which is the current equilibrium.

If natural resource countries increase their consumption preference and import manufactured products from East Asia, East Asia would have more purchasing power in importing from the rest of the world. The US trade deficit would narrow. As East Asia’s trade surplus dwindles, the fate of the US trade balance rests with the choices made by natural resource economies, in my view.

Posted by: dirk on July 31, 2003 02:25 PM

> anne on July 31, 2003 01:19 PM

>"The worry about the lack of American saving and the resulting balance of payments debt...is no immediate concern..."

The US ran a current account surplus only ONCE in the last 23 YEARS. That situation has been bleak and getting bleaker for AT LEAST the last decade and a half. Check it out yourself:

http://www.bea.gov/bea/di1.htm#bop

So far as can be determined:

"At yearend 2002, the value of foreign investments in the United States exceeded the value of U.S. investments abroad by $2,387.2 billion (preliminary) with direct investment valued at current cost.

http://www.bea.gov/bea/di1.htm

Just out of curiosity, anne:

WHEN do YOU think the "long term" WILL get here?

More to the point, I suppose: What do YOU think it will LOOK like? When it DOES get here, I mean...

Posted by: Mike on July 31, 2003 02:31 PM

http://www.economist.com/markets/PrinterFriendly.cfm?Story_ID=1957835
Household saving rates (the US at 3.7% is above Australia, NZ and Finland)

Posted by: dirk on July 31, 2003 02:33 PM

WHEN do YOU think the "long term" WILL get here?

http://www.cm1.prusec.com/yararch.nsf/(Files)/a_072903.pdf/$file/a_072903.pdf
maybe when the bond market vigilantes decide so?

Posted by: dirk on July 31, 2003 02:40 PM

Money & Business 7/21/03

By Lou Dobbs

In hock to the hilt

"...Most of the attention is focused now on the federal budget deficit, which could reach an astonishing half-trillion dollars next year. The overall national debt could almost reach its congressionally mandated limit of $7.4 trillion. State governments, most of which are required by their constitutions to balance their budgets, will have combined deficits of an estimated $70 billion next year...

...Consumer debt is on the rise, and personal bankruptcies are skyrocketing. Reports show that consumer credit increased 5 percent in May, to $1.76 trillion, and household debt now stands at 110 percent of annual disposable income, up from 76 percent in 1986. Americans set a new record last year for going broke, with 1.6 million people filing for personal bankruptcy....

...Joseph Pomykala, professor of economics at Towson University, points out, "The bankruptcy rate is atrociously high right now . . . 12 times the rate of the Great Depression on a per capita basis...."

http://www.usnews.com/usnews/issue/030721/opinion/21dobbs.htm


Posted by: Mike on July 31, 2003 02:45 PM

WHEN do YOU think the "long term" WILL get here?

http://www.cm1.prusec.com/yararch.nsf/(Files)/a_072903.pdf/$file/a_072903.pdf
maybe when the bond market vigilantes decide so?

Posted by: dirk on July 31, 2003 02:46 PM

>"maybe when the bond market vigilantes decide so?"

I wouldn't worry too much about THOSE 'good fellas' if I were you, dirk....

(They're caught between Iraq and a hard place ;!)

Posted by: Mike on July 31, 2003 02:58 PM

Should anyone be worried about rising rates? The GDP report sent bonds reeling. What's the optimum mix of growth and rates? Will we overshoot the sweet spot and kill the housing boom?

Thanks in advance for any answers.

Posted by: Simka on July 31, 2003 04:00 PM

Calpundit says, "Without the war, GDP would have increased by only $16 billion, an annualized rate of .67%. "

Posted by: IssuesGuy on July 31, 2003 04:10 PM

Bakho:

Key word was shrank, which I missed, but you noticed. Thanks for clearing up my sloppy reading here.

IssuesGuy: Calpundit raises a concern. What if we get lucky and bring the troops home soon with defense spending falling? Now if that leads to an investment and net export boom - great. If not, could we be in for the double-dip?

Posted by: Hal McClure on July 31, 2003 04:27 PM

Question - If the government is responsible for 40%+ of the increased growth, which is not a bad thing if it were for a wide sector of employment (building roads, other state-federal improvement/large employment endevors). But being military, and thus a small, very select group of business with limited number of employees (except the military themselves) and the profits going to even a smaller group of people, how is this such a positive thing, to the extent that I am understanding your level of enthusiasm.

Several other sites who have at least some of the credentials you hold, say that they do not expect this to hold up for more than one or two more reporting periods.

Also, the bond market is showing the effects of the increase in mortage rates (small as they are) and as of yet the only profit companies are showing are from internal changes (laying off employees, closing stores) which benefit the stockholders, but do little to add in consumption (I don't work, I don't buy). Which is supported by the poor employment statistics.

An added note, if the housing market starts to decrease, of which there are the begining signs, this would have a noticeable negative effect, in that it was the housing market that keep the economy going for the past year or so, if I understand it correctly.

I ask these questions, because I value your input, and believe you would not be as pleased as your article indicates, unless there is something beyound what I am seeing.

Posted by: WR on July 31, 2003 09:52 PM

Even if people don't believe that the U.S. is receiving an exchange rate subsidy, I don't understand the concerns expressed here about our trade balance. In this current worldwide businesss environment are there really a lot of good, safe investments available out there? Is there anything for foreign holders of U.S. debt to fear until there is a real threat of inflation? Is anybody here really concerned about inflation right now?

Posted by: Stan on August 1, 2003 06:23 AM

Mike,

Goodness, you’re busy.

Housing starts fading? Nope. June starts, at an annualized pace of roughly 1.8 million, were in the top 5 readings of the past decade and a half, well above last year’s average pace, In fact, starts for the first half of 2003 are ahead of last year’s pace. Starts may slow down , but with permits for new starts strong in June, there is at least some momentum to keep things going into July, and mortgage applications for the purchase of homes are still trending higher – up about 18% from a year ago.

As to the notion that “nobody” talks about the trade deficit – call your congressional representative and ask to see the last 5 things he or she put out regarding the trade deficit. Bet they all fall within the last 5 months. One a month, at least. The Institute for International Economics and the Economic Policy Institute, just to name two, have made an industry of looking at the implications of the trade deficit. Call you local chapter of the AFL-CIO or National Association of Manufacturers. Way up on the policy agenda of each for the coming national election is beating the dickens out of China over trade (by extorting pledges from candidates). The foreign exchange market, in its rotating series of worries, frets over the sustainability of the current account deficit a few times every year. Lots of folks are thinking about the trade deficit.

…and please don’t quote Lou Dobbs.

Some other folks have worried that the trade figures in the GDP report are bad. Thing is, they almost certainly have to get worse before they get better. The “real” (price adjusted) GDP data, since they do not include the impact of oil price swings, probably understate the problem right now. Price adjusted trade figutes do give the impression that, even should oil prices drop, the trade deficit will remain very wide. As long as the US outgrows its major grading partners (Canada and Mexico appear to be slowing, so any pickup elsewhere may be offset), the trade gap will remain wide. China, of course, will be the drum that politicians beat during the election campaign to address the trade problem – China has to figure in each election, the only question being “how?”

Posted by: K Harris on August 1, 2003 10:49 AM

naive question from non-economist:

why is an increase in GDP automatically interpreted as positive without regard to how it arises? recent positive contributors to GDP have been mostly (totally??) components that suggest increasing indebtedness (eg, this Q driven by autos and fed spending, the former most likely debt financed, the latter unequivocally). isn't there a "quality of earnings" type issue here?

and then there's the economist on tonite's Newshour who added back the negative export contribution (because it was a "drag" on GDP - pesky things, those definitions) to get 4% growth.

putting this all together, can't we easily get a boom going if everyone will follow fed governor ??'s suggestion to go buy an SUV on credit (helps personal consumption and net exports via oil purchases), the fed gov abandons all fiscal constraint, and (adopting the economist's "reasoning") we all agree to buy imported goods whenever possible?

Posted by: ctw on August 2, 2003 02:11 AM

naive question from non-economist:

why is an increase in GDP automatically interpreted as positive without regard to how it arises? recent positive contributors to GDP have been mostly (totally??) components that suggest increasing indebtedness (eg, this Q driven by autos and fed spending, the former most likely debt financed, the latter unequivocally). isn't there a "quality of earnings" type issue here?

and then there's the economist on tonite's Newshour who added back the negative export contribution (because it was a "drag" on GDP - pesky things, those definitions) to get 4% growth.

putting this all together, can't we easily get a boom going if everyone will follow fed governor ??'s suggestion to go buy an SUV on credit (helps personal consumption and net exports via oil purchases), the fed gov abandons all fiscal constraint, and (adopting the economist's "reasoning") we all agree to buy imported goods whenever possible?

Posted by: ctw on August 2, 2003 02:16 AM

Steven Berke,

True enough that there are two revisions after the first release of GDP data. If there is a tendency for the revision to move toward early estimates, I am unaware of it. A few things to note. The Commerce Department has admitted to an error in processing the construction spending data for Q2. Correction of the error appears to add about 0.1% to GDP. Factory inventories for May were revised downward by 0.1%, not enough to offset the construction spending error. ISM factory data, which have a fairly good record for "adding information" to bottom up forecasts (adding up available constituents to get a GDP estimate) suggests something just shy of trend growth in Q2, so the 2.4% (make that 2.5% with the construction spending revision) is closer that the 1.5% median forecast ahead of the data release. The Fair model (built by Ray Fair), which I understand has an OK record for forecasting major US macro variables, put Q2 GDP growth at an annualized 2.7% in its April forecast round. If I were taking bets, I'd go for an upward revision to that 2.4%.

Posted by: K Harris on August 4, 2003 12:47 PM

The calculations above are wrong. They most certainly DO compound growth rates. The actual growth of GDP in Q2 was not 2.4%/4. It was the fourth root of 1.024 minus 1. The actual growth rate of real federal defense spending was 9.6% (the fourth root of 1.441 minus 1) not 11.0% (44/1%/4). The reported levels were $409.7B in Q1 and $448.9B in Q2. Do the calculations yourself. You have a lot of nerve to attack journalists for doing the calculations wrong when you are a prominent economist and you can't even get them right.

Posted by: Booey on August 19, 2003 10:22 AM
Post a comment