Wednesday, April 30, 2008

Real U.S. GDP Continues To Contract

The latest U.S. GDP report has almost a déjà vu feeling over it, being in many aspects nearly identical to the one released three months earlier about the previous quarter. Then as now, the headline number that the financial press focus on was slightly positive (exactly 0.6% by an amazing coincidence) and then as now was the real terms of trade adjusted slightly negative (-0.3% this time as compared to -0.7%). The reason for this divergence was that the fast increase in import prices made the GDP price index increase much slower than the price index for gross domestic purchases.

And then as now did government spending continue to increase, meaning that the real decline in private sector activity was even bigger. Government purchases (including both government consumption and investments, but not including transfer payments) rose to 19.9% of GDP, the highest since the third quarter of 1992, and way up from a (post-World War II) low of 17.2% in the first quarter of 1998.

The main difference is that the other details look even worse. Not only did residential investments continue to fall, but business investments turned down, a expected development considering the decline in domestic profits. As domestic profits continue to decline so will business investments. The trade deficit meanwhile continued to rise, from $708.9 billion at an annual rate to $737.3 billion, although due to the perverse methodology of the headline volume measure, that still counted as a positive contribution from trade as the rise was caused by rising import prices. Inventories were roughly unchanged, but as they fell the previous quarter, that still meant they gave a positive contribution to GDP.

Consumer spending rose slightly, at a 1% rate. What was seemingly positive was that real disposable income rose slightly faster than that and so the savings rate rose. But the savings rate was still zero, and that is far too low, especially in a situation with falling asset values. Moreover, this increase do not reflect household's share in sharply declining retained earnings (dividend payments continue to rise despite falling profits)-and a rising budget deficit. Speaking of which, the so-called tax rebates that are now paid out will no doubt boost real disposable income this quarter, which in turn will likely boost both consumer spending and the formal savings rate for the second quarter. But that will be anything but a sound or sustainable upswing.


Anonymous Anonymous said...

What about GDP per head?i know nobody is looking at these figures but if we take into account the fact that american population rose about 1% real GDP per head is already declining.As an article of the economist recently showed data about GDP per head growth the last 5 years are very surprising.

11:12 AM  
Blogger stefankarlsson said...

Yes, the decline is of course even bigger if you look at it on a per capita basis. But for reasons explained in the post, that adjustment is not necessary to conclude that growth is negative.

3:26 PM  

Post a Comment

<< Home