Thursday, July 31, 2008

GDP Data Much Worse Than The Financial Press Tells You

So the official GDP number came in at 1.9%-close enough to my 2% forecast for me to be able to say "See, I told you so" (especially since I added "give or take a few tenths of a percentage points"). Brian Wesbury on the other was wide off the mark with his 3% forecast.

The review of previous data also came in as I expected, with inflation being revised up even as nominal growth was revised down producing an even bigger decline in real growth. However, I have to admit that I expected a bigger downward revision (because previous downward revisions were greater).

Looking at specific quarters, Q4 2007 official growth was revised down to -0.2% from +0.6% and Q1 2008 from 1.0% to 0.9%. However, the real numbers are in fact even worse than these numbers suggest, for two reasons.

First, there is the factor that I've mentioned several times before, namely the terms of trade factor. This was actually most dramatic during Q2 2008. That alleged 1.9% growth depended on the ludicrous assumption that inflation was just 1.1% at an annual rate. If you instead deflate the nominal GDP growth of 3% with the 4.3% increase in the gross domestic purchases deflator, then growth was -1.2%.

Second, income data suggest far weaker growth. National income should in theory be equal to GDP plus/minus net factor income from abroad minus capital consumption. Yet because they originate from different data sources they usually aren't equal, something which is accounted for by a post called "statistical discrepancy". National income for Q2 2008 is not yet available, but between Q1 2007 and Q2 2008, the statistical discrepancy rose from -$188.4 billion to $43.6 billion, meaning that national income rose $232 billion less than GDP. I calculated real GDP and real national income by dividing the change in the nominal number with the change in the price index for domestic purchases. Here is the result, with the headline volume number besides them.

GDP Volume GDP Real NI Real
Q2 2007 +4.8% +3.4% +1.6%
Q3 2007 +4.8% +4.0% +1.2%
Q4 2007 -0.2% -1.3% -0.9%
Q1 2008 +0.9% 0.0% -2.0%
Q2 2008 +1.9% -1.2%

(Sorry about the unaesthetic format, but blogger for some reason refuses to accept my attempt to create margins between the numbers. If anyone knows how to fix the problem, they're more than welcome to tell me)

The reason that no real national income number exist for Q2 2008 is because as I mentioned before, the number for national income is not yet available. As you can see ,real GDP was weaker than volume GDP for all quarters, with the difference being greatest for the latest quarter. Real national income was weaker than real GDP for all quarters except Q4 2007 when an increase in net factor income boosted national income. Still, real national income remained weaker than volume GDP.

Given the widespread economic discontent among Americans, it should be obvious to anyone outside the group of pro-Republican supply-siders that real national income better reflect the economy than volume GDP.

Finally, it should be noted that government demand (this includes all government purchases, both those considered consumption and investments, but does not include transfer payments like welfare and social security) reached 20.1% of GDP, the highest since Q2 1992. During Clinton's last year in office, this number was below 18%, and as late as Q1 2007 it was 19.2%. This increase is primarily driven by higher military spending, but non-military government purchases also increased. This means that the decline in the private sector is even greater than the above numbers suggest.


Anonymous Anonymous said...

Thanks for this post, Stefan. Another problem with the GDP deflator is that it does not account for intermediate goods or services. How might one go about accounting for such intermediates?

You can also answer here if you wish:


4:09 PM  
Blogger Klas said...

Tip for margins: Creata a table tihout visible lines.
the blog, actually even HTML, doesnt like more than on space in a row, and will not accept "tabs"


10:54 AM  

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