The Goldilocks GDP Number

The Bureau of Economic Analysis (BEA) gave us their advance estimate for 2nd quarter GDP on Friday July 27, 2012.

Real gross domestic product — the output of goods and services produced by labor and property located in the United States — increased at an annual rate of 1.5 percent in the second quarter of 2012, (that is, from the first quarter to the second quarter), according to the "advance" estimate released by the Bureau of Economic Analysis. In the first quarter, real GDP increased 2.0 percent...

The increase in real GDP in the second quarter primarily reflected positive contributions from personal consumption expenditures (PCE), exports, nonresidential fixed investment, private inventory investment, and residential fixed investment that were partly offset by a negative contribution from state and local government spending. Imports, which are a subtraction in the calculation of GDP, increased.

The deceleration in real GDP in the second quarter primarily reflected a deceleration in PCE, an acceleration in imports, and decelerations in residential fixed investment and in nonresidential fixed investment that were partly offset by an upturn in private inventory investment, a smaller decrease in federal government spending, and an acceleration in exports.

Rick Davis of the Consumer Metrics Institute sent me an e-mail noting that the BEA served up a "Goldilocks" number which was not too hot and not too cold (see here).

But perhaps the most interesting aspect of the report comes from a more political reading of the numbers.

If the BEA had set out to engineer a report that would seem plausible while not triggering "doom and gloom" headlines in the mass media, this is exactly the kind of number they might choose.

Anyone can create either "continued growth" or "weakening recovery" sound bites from the report — depending on your vested point of view.

And meanwhile they have certainly not bitten their master's hand.

Good to hear! Craziness As Usual (CAU) can proceed uninterrupted in the United States. Hopey-Changey can refer to growth. The Mittster can refer to failure. God only knows, we wouldn't want to throw a monkey wrench into the works at this point. There are only 99 days to go.

Rick also noted that growth in personal consumption expenditures (PCE), which is generally referred to in the regular media as just plain Consumption, contributed only 0.18% to the headline number (1.54%). Tim Iacono notes that PCE contributions have been muted since 2008. This graph from his Consumer Spending Cools, Growth Slows was updated to reflect BEA revisions to GDP starting in the 1st quarter of 2009.

... the most important take-away [is] the steady shrinkage of the red bars that represent personal consumption expenditures [PCE], what many still refer to as “the engine” of U.S. economic growth. After an average contribution of nearly 2.4 percentage points for personal spending prior to the 2008 recession, this mark has been achieved only once since the “recovery” began in 2009 when, in late-2010, personal consumption expenditures contributed 2.84 percentage points to the overall total. In fact, over the last three years, this category contributed an average of 1.54 percentage points to real GDP growth, knocking nearly a full percentage point off of the headline number as the debt-fueled spending spree of recent decades came to an end.

The BEA revisions to economic reality show that "the recovery" was less robust than first thought. Bloomberg Business Week made this comment in The Recovery Begins to Fade Before Our Eyes.

But here’s the really bad news: The U.S. came out of the recession in 2009 a lot slower than we first suspected.

That's a surprise?

The Commerce Department reported that in the first 12 months of the recovery, which began in June 2009, the economy grew by just 2.5 percent, not the 3.3 percent we first suspected were told.

That flies in the face of the usual history of economic cycles that says the deeper the downturn, the higher the bounce. Recoveries usually come out of the box with a bang, especially when you inject so much fiscal and monetary stimulus into the system. But, as David Rosenberg, chief economist at Gluskin Sheff, told me the other week,

“This is the strangest business cycle I’ve ever seen.”

Well, Dave, that's because the so-called "Business Cycle" should now be consigned to the dustbin of ancient history. In fact, I think the business cycle ceased to exist at the beginning of the Bubble Era (1995-2007). Say goodbye to all that. The world has changed. Get used to it.

And there is one final anomaly concerning the 2nd quarter GDP number, as noted by Rick Davis.

We have previously been critical of the "deflaters" that the BEA has used to correct the "nominal" data into "real" numbers. For 2Q-2012 the BEA assumed annualized net aggregate inflation of 1.51% (compared to the revised 2.16% annualized rate assumed for the prior quarter).

In contrast, during the second quarter the seasonally adjusted CPI-U published by the Bureau of Labor Statistics (BLS) actually recorded mild deflation at a -0.84% annualized "inflation" rate — i.e. the CPI-U was considerably lower than the BEA's deflater.

Did you catch that? Deflation! The dreaded D-word. The bane of Keynesian economists everywhere.

If the CPI-U's deflationary rate had been used to deflate the BEA's raw "nominal" numbers, the reported growth rate for the economy would have been substantially better (at 3.91%) than the published headline rate.

Thus if the BEA had used our recent CPI-U deflation (-0.84%) to deflate 2nd quarter nominal GDP, the growth rate would have been absurdly high (3.91%). Even the dumbest smart person in America might have noticed that something was amiss. Reporting such a crazy growth rate would have been tantamount to rocking the boat, which is verboten, as I noted in yesterday's post Is America Crazy? You Betcha! That would not have been a Goldilocks number.

And thus we now have the "official" story (so far) for growth in the American economy in 2012. Not too hot. Not too cold. Just about right, at least for political purposes.

Comments

[Wanooski]

Well, Dave, obviously if it's just right for political purposes, it's just right for America!