GDP: Good or Fair?
from Peter Radford
The initial reaction to Friday’s GDP report for the United States has to be positive. The U.S. economy grew at an annual rate of 3.2% in the fourth quarter of 2010, up from a revised 2.6% during the third quarter. So the recovery seems secure and well on track. Here is my usual breakdown of the parts of the economy and how much they all contributed to the total:
- Consumption: added +3.0%
- Private Investment: subtracted -3.2%
- Trade: added +3.5%
- Government Spending: subtracted -0.1%
The interesting number here is that consumption figure. Personal spending rose at the sharpest pace for four years, driven particularly by a strong showing in durable goods. This is encouraging because these ‘big ticket’ items are normally easily postponed when households are adjusting their balance sheets and when fears of unemployment prevent people making long term financial commitments. So this gain may be a sign that consumers are feeling better bout the future and might suggest the economy will move ahead well during 2011. Notice all those words like ‘might’ etc. We need to wait and see whether the numbers are not revised downward as better information is analyzed. And we need to see this momentum, if it turns out to be real, maintained throughout the year. Even with all these caveats, the news is good. Sales of services seem stuck in a bit more of a rut and grew at pretty much the same pace as they did all through last year. There has been no acceleration in that sector. So we could easily construct a more negative narrative: consumers postponed their big ticket purchases as long as they could but eventually they were forced to buy – things wear out after all – and the underlying rate of household consumption is closer to the growth rate of services than that of durable goods. Hence the need to wait and see. Incidentally durable goods sales jumped 21.6% from the third to the fourth quarters, hence my mild skepticism about the sustainability of that pace.
The picture in investment was also very distorted. Here it was the run down in inventories that muddled things. Non-farm inventories suddenly shifted into reverse as businesses ran down their stocks during the holiday sales, so after several quarters of helping keep GDP rising, inventories actually knocked a big hole in growth. This change masked a very mild recovery in residential investment which managed to record only its third gain in the last nineteen quarters. Having said that the gain was negligible, but that it existed at all is noteworthy.
Trade too was subject to a big shift. Exports have been recovering quite well for several quarters and continued to rise at a decent rate. But imports suddenly dropped which is why the total impact of trade was so beneficial. Given that worldwide demand for commodities is putting a great deal of pressure on prices I suspect that the trend in imports will turn negative again during the summer. Plus there seems to have been a modest amount of stockpiling of imports during the late summer and early fall which meant importers could reduce their activities subsequently. This too probably shifted the numbers around a bit and so the sharp turn in today’s report may not be representative of a ling term trend.
Lastly, the government spending line is something of a warning. The effects of the stimulus are now well worn down, which leaves us with the increasing drag on GDP caused by the continued, and increasing, austerity at the state government level. This is something to watch. As the austerity hawks gain more control we can expect government spending to taper off somewhat. This will press down on growth and harm our prospects during 2011 and beyond. Today’s report could simply be the beginning of that downward trend.
So, overall, the report is good. Remember it is preliminary and subject to revision. Typically those revisions can be quite large. So keep a large asterisk against this data. Having said that it is good to see GDP running at a rate above 3.0%.
One last thing though: even at this pace we will not work unemployment down very quickly. We lost an enormous amount of GDP activity during the downturn. Had we not had a recession the economy would be about 7% larger than it is today. That’s a lot of jobs. Moreover, at a steady 3.0% rate of growth we would need years – maybe a full decade – to get catch up to where we would have been. So although this is a good report, it isn’t really goo enough to get too excited over. We need more rapid growth for a while to make that catch up period more tolerable. There’s not much evidence we will see such an acceleration.
Which means we are in for a long, steady climb, rather than a rapid ascent.
Translation: good, but not quite good enough.
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Real-World Economics Review Blog 
what an optimist!!
Personal spending rose? Spending by whom? It makes a big difference. The Financial Times reported that luxury goods were selling well, low priced goods not so much. Lois Vuitton up, Walmart down.
That the GDP rose is good news only if the Gini index did not continue its dizzying ascent, as inequality rises to more and more dangerous levels.
In Egypt, as the street riots signaled the end of the regime, private jets scrambled, carrying their owners out of the country with their families
How much more “good news” on the GDP will it take to make that happen in the USA?
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I guess when the rich are scrambling for their jets then the big banks must surely follow them?…perhaps we should be watching first class one way flight numbers for signs of an improvement in the US economy?
I would rather look at PRODUCTION figures, both goods and services (NOT FINANCIAL services, – such as management fees, mind you…). The Trade Deficit!!!… If the USA keeps growing because of growth in consumption with substantial (?…) imports paid with paper notes… rather than with substantial exports…
@Peter Radford
Peter, what do you think? Reading the signs, I think that the USA economy is already quite competitive and net exports will probably keep contributing to demand (and therewith: to growth, as businesses do need demand to sell. Why is it by the way so complicated to accept that consumer demand and export demand do the same thing to total demand as government demand?). The problem will of course be that if net exports increase the number of jobs will increase – but disposable income not, as total amount of disposable goods and services will not increase (more is exported). At the same time, I expect commodity prices to stay volatile (Paul Krugman is of course right on that one) – but on a higher average level than before (which in the end, and that might take years, will cause ‘core prices’ to increase, Krugman is not right on that one) which means a deterioration of the terms of trade, which translate as lower purchasing power. So, more jobs – but lower purchasing power (unless the GINI comes down)?
By the way, as a child I lived in Colombia, my father working for Philips – am I right that the USA is becoming more and more ‘South-American’, with very high income inequality, poor public services for the poor and excellent medical en educational services for the rich, lots of poorly paid manual and domestic workers and nanny’s, racial tensions and corrupt politics?
@Guilherme,
The National Accounts do not count trade in ‘second hand’ items, like existing houses, e-bay stuff, existing art, non-produced assets like land, existing stocks and (thank you for the suggestion) the mother of all second hand items: money. When asset prices increase, GDP does not increase (the national accounts really are a smart system. They do not count transactions (as neo-classical economists would want it, exchange itself and not the income in generates being the producer of ‘utility’) but real production. They do however count fees paid for these transactions, like the income of a real estate broker. Banks are however quite complicated, as so much of the trade in money is between banks and as assets sometimes change ‘color’ when they are securitized: is cutting up mortgages production, or isn’t it?. As more people have been ranting on counting trade in financial assets as ‘production’, I hope to return to this.
Fascinating points.
My guess, is that the huge rise in inequality has shifted the way in which rising employment translates into rising demand. With the current distribution of incomes, the level of employment necessary to get sustainable strong growth may well be beyond our reach. The entire potential has shifted downwards because of the skewed way in which profits have taken a steadily increasing portion of productivity growth. Sooner or later this imbalance has to show up the way you describe. Now may well be the time. What is surprising, perhaps, is how supine the workforce has been throughout the entire shift.
As for your general observations about the US. I moved here from the UK in 1977. Since then I have witnessed an almost willful attempt to allow the nation’s basic services and infrastructure to deteriorate. It is difficult to convey the enormous gulf that now separates the life experience of the wealthy and that of the poor. Worse still is the indifference that pervades to the problems. The crucial longer term issue is the erosion of the vaunted American middle class lifestyle: rising educational and health care costs, coupled with stagnant wages have slowed, if not eliminated, the progression through the famous “American Dream”. Social mobility here is more rigid than in Europe for those born here, so the “dream” really exists only for immigrants. There seems to be no doubt that my children face a much more difficult future than I did. While that may be common throughout the industrial world, the impact it has here, where social flexibility is a major feature of the nation’s psyche, is proportionately greater. This is one factor underlying the more extreme nature of our politics: the dissatisfaction is palpable, yet hard to remedy since we have executed a very free market, pro-capitalist, set of policies that resonates with the core of America. To fix things we need to alter that core. I doubt that will change quickly, if at all. So we have arrived at a dead end and need new ideas. But the political system is unresponsive, corrupt, and diffuses power. That leaves the potential for special interest groups to have enormous power and hold up reform.
That sounds very “South American”. But we shouldn’t over play it. The entire industrial world is having to rethink the socioeconomic arrangements created after World War II, so America is not alone.