GDP

2014 Exits Like a Lamb

Real GDP grew at a mediocre 2.6% in the fourth quarter of 2014, according to the latest release from the BEA.   Keep in mind, this is the first estimate of real output for last quarter and subsequent revisions have been significant recently.  However, if this estimate holds up, it means that 2014 ended on a relatively weak note, after two very promising quarters.  The graph below shows quarterly real GDP growth for 2013 and 2014:

GPDShort2014.IV

As the figure shows, 2014 was a mixed bag - with 2.4% growth for the calendar year.  The first quarter brought negative growth, probably supply and weather-related.  The second and third quarters both brought strong growth, but then that seems to have tapered off by the end of the year.  This followed just 2.2% growth in 2013.

But the long run picture certainly looks better than just a few years ago.  We now have five consecutive years of positive annual growth.  This graph shows the path of real GDP over the past fifty years:

GDPLR2014

Growth over the past five years hasn't been explosive, at just 2.2% (versus 3% over the last fifty years), but the expansion period since the Great Recession, which ended in June 2009, is now over five years.

Finally, we can look at the contribution to growth from the four components of GDP in 2014:

GDPTable2014

Over the course of the year, consumption contributed the most to growth but investment was also up.  Expenditures by all levels of government in 2014 were essentially flat, and net exports fell slightly (imports increased more than exports).

The next GDP update is scheduled for February 27.


Sex, Drugs and GDP in Europe

In September,  Eurostat waved a magic wand and increased the GDP in the European Union by 3.53 percent overnight. That is a full year's worth of very solid growth.  But it didn't make Europeans any wealthier because it was actually just due to a new definition of the way GDP is counted.  Eurostat (the economic statistics office of the European Commission) redefined GDP to include many transactions that were previously uncounted and are actually illegal across much of the Eurozone.
 
The new GDP definition includes illegal drug deals, prostitution, and even sales of stolen goods. Specifically, it includes illegal transactions as long as both parties agree to the transaction.
 
European-cannabis-lawsOstensibly, Eurostat is trying to capture part of the shadow economy that is typically not measured in GDP.  This makes sense, right? GDP is supposed to measure the output of final goods and services, so shouldn't we include all final goods and services even if the service is illegal?  In addition, this is complicated when the legality of goods and services varies across nations.  For example, the map to the right (from Wikimedia Commons) shows how cannabis laws vary across Europe - cannabis is essentially legal in some nations like the Netherlands but strictly illegal in others like France. 
 
So, normalizing the accounting standards across nations makes sense. But these illegal activities are difficult to measure.  In addition, if the illegal activities are a relatively stable portion of GDP, then there is really no bias when they are not included.  In fact, the new estimates, in an attempt to provide a more complete measure, may actually introduce more error into GDP measurement due to the difficulty of estimating illegal trade.  
 
So why the change in definition? There is another, perhaps insincere rationale: the new GDP measurements are a bit of an accounting trick to help nations lower their deficit to GDP ratios.  Many European nations are dealing with high deficit (and debt) to GDP ratios. The European Commission has explicit rules regarding these budget measures: a nation's deficit in a given fiscal year is not to exceed 3% of  their GDP, and the national debt is not to exceed 60% of GDP.  When nations exceed these bounds, the Council is directed to bring coercive measures called Excessive Deficit Procedures (EDRs). The Council has certainly been lax in enforcing these EDRs in recent years.  However, increasing GDP by simply redefining how it is measured automatically lowers deficit and debt ratios and helps nations with higher government debt levels. 
 
The figure below shows the effect of the new GDP definition on the GDP level each nation in 2013 (along with the overall EU and Euroarea).  The countries are ordered according to their GDP gains from the ESA 2010.
 
GDP percentage change ESA 10 mac
 
As you can see, GDP for Cyprus jumped 9.8% exclusively due to this accounting change.  This re-definition of GDP then shrank the debt-to-GDP ratio in Cyprus by a full half of a percentage point in 2013 - reducing it from 5.4% to 4.9%.  Therefore, this accounting rule change exaggerates any debt reduction in Cyprus, as they (hopefully) move closer to the EU goal of 3 percent.
 
So while new GDP accounting rules in Europe may normalize national income accounting across the continent, they are particularly helpful to those nations that already have high government debt levels.

GDP Growth Estimate Increases

With today's GDP data release, the BEA increased their estimate of real GDP growth in the third quarter today to 3.9 percent (up from th earlier estimate of 3.5%). This, combined with the 4.6% growth from the second quarter, means the U.S. economy experienced solid and above normal growth through the middle of 2014. 

GPD2014.IIIB

The revisions in the new release, based on more complete data, include upward revisions in both consumption and investment.  The contributions to overall growth from each of the four major components of GDP are presented in the table below:

GDPTable2014.IIIb
 

You can download the data here.


Growth Continues in Third Quarter

 Real GDP grew 3.5% in the third quarter, according to the advance estimate released by the BEA.

  GPD2014.IIIA

A big piece of the growth came from net exports (exports minus imports).  Exports rose by 7.8% and imports fell by 2.4%.  Since net exports makes up a very small piece of total GDP, this contributed 1.3% to real GDP growth, but this is more than a third of the total growth in the third quarter.

Here is  a complete breakdown in the growth contribution from each of the four major components:

GDPTable2014.III

Overall, 3.5% is a solid growth rate, assuming this estimate holds up through revisions over the next three months.  However, it is slower that the growth experienced in the second quarter, which was 4.6 percent.  One big difference between the last two quarters is in investment which contributed just 0.2% to third quarter growth but contributed 2.9% in the second quarter.


Second Quarter Strongest since 2006

The BEA now estimates that real GDP grew by 4.6% in the second quarter. This revision means that the most recent quarter saw the fastest real GDP growth since 2006. That's a long time.  Before we get too excited, let's remember that this comes on the heels of negative growth in the first quarter.

Screen Shot 2014-09-26 at 4.31.06 PM

The growth was driven largely by changes in investment, which grew by $115.5 billion, or 19.1 percent on an annual basis.

Those who follow me on Twitter may recall that, back on July 3, I predicted that second quarter growth would come in at "something like 5 percent." My rationale was that the negative first quarter growth was likely due to short run supply factors associated with the polar vortex.  After all, the unemployment rate fell consistently throughout the spring.  Even a blind squirrel finds a nut once in a while.


Solid Growth in Second Quarter

The second estimate of real GDP growth from the BEA and it confirms a strong rate of 4.2 percent.

GPD2014.II

The strong second quarter reinforces my view that the first quarter contraction (-2.1%) was largely due to a short run supply shock.  It seems like a long time ago now, but you probably remember just how cold that polar vortex was.

One last graphic.  This one is an update that shows how the path of real GDP is just not moving back to the long run trend prior to the Great Recession. 

GPDtrend2014.II

Something structural definitely happened during the Great Recession.  Aggregate demand declined, but long run aggregate supply must have too.


The GDP Report in 3 Graphics

Real GDP grew at 3.2% in the fourth quarter of 2013, according to the first estimate released by the BEA this week. This news is decidedly... not terrible.  You could spin it to be good news or just mediocre news.  But, assuming the estimate doesn't change much in subsequent revisions, we've now had two solid quarters of growth.

The first graphic shows real GDP growth since 2003, by quarter.  Recession periods are shaded and the dashed line shows the long-run average of 3%.  For the year 2013, real GDP grew at 1.9%. Though this isn't too impressive, it's understandably driven by poor performance in the first quarter.

GPD2013.IV

The second graphic shows the long-run path of real GDP, going back 50 years.

GDPLR2013

Finally, we can zoom in on real GDP over the past twenty years along with a trend line.  This graphic clarifies the mediocre nature of growth in the wake of the Great Recession.  At some point, we hope that growth can restore GDP to the long-run trend line.  There just hasn't been any bounce coming out of that last recession.

GDPgap2013

Keep in mind, this is just the first estimate for 2013 GDP and subsequent revisions can be significant.


GDP news gets better yet

The third (and final) GDP estimate for the third quarter revised growth up yet again, this time to 4.1%.  This figure indicates that growth was stronger in the third quarter than at any time since the end of 2011. The graph below shows quarterly growth rates since 2003.
GPD2013.IIIc
Notice that 4.1% is larger than all but one quarter since before the Great Recession.  These are the kinds of growth rates we need if the economy is to truly recover from the Great Recession.  Finally, the revisions indicate that more of the growth came from consumption than previously thought.  The table below shows how each of the four categories of GDP spending contributed to overall growth. GDPTable2013.III

The takeaway:

  1. GDP growth in the third quarter was higher than all but one quarter since 2006.
  2. The new data shows greater growth in consumption.

GDP growth revised up to 3.6%

This week's GDP report, the second GDP estimate for the 2013 third quarter, brings good news, though perhaps not as good as it seems.  The report revised the growth rate up to 3.6% (the first estimate was 2.8%).  Quarterly growth data since 2003 is graphed below.

GDP2013-3b
There is nothing wrong with 3.6%.  After all, that is the best single quarter since the end of 2011.  On the other hand, the big growth came to business inventories which contributed almost half of the GDP growth of the period (1.68 of the 3.6%). 

Here is the breakdown of the contributions from the four major components of GDP:

  • Consumption: +0.96%
  • Investment: +2.49%
  • Government: +0.09%
  • Net Exports: +0.07%

Remember that private inventory is part of investment.