(No, this is not a call for protectionism.)
The third-quarter GDP growth numbers are better than originally reported, as today the Commerce Department revised them from their 2.0% initial estimate up to 2.5%. As many commentators have no doubt noted, that’s still short of the 3.0% thought to be necessary to reduce the unemployment rates. But we should not stop there. The more I look at the quarterly GDP figures, especially in the Commerce Department’s full report, which includes a table that breaks down the contribution to percent change in real GDP from each of the main components, i.e., consumption, business investment, government purchases, and net exports, the more it looks like a real recovery is underway.
Looking over those GDP breakdowns over time, a couple patterns emerge. First, as is often noted, fluctuations in business investment tend to be the key to recessions and recoveries. Investment is highly volatile, more so than consumption, and it tends to lead the business cycle. Second, net exports are even more volatile and, unlike investment, don’t have much of a cyclical pattern. They seem to be mildly countercyclical (in a recession that hits the whole world evenly, our imports would fall more than our exports would, simply because we our imports are much larger than our exports to begin with), but whatever cyclical pattern exists seems to be swamped by other fluctuations: just eyeballing the numbers, the GDP contribution of net exports looks like one of those “random walks.” Consider net exports’ percent contribution to real GDP over the past five quarters (i.e., since recovery officially began, or 2009:III-2010:III):
Not much of a trend there –close to -1.5% in the first quarter of the recovery, sharply positive in the second, near zero in the third, huge and negative in the fourth, back around -1.5% in the fifth. These big fluctuations can drive the quarterly real GDP changes, masking what’s happening in the domestic economy. Officially, real GDP over the past five quarters grew by the following amounts (seasonally adjusted at an annual rate:)
Again a lot of fluctuation, with the strongest readings coming the two times when net exports’ contribution was either positive or near zero. If we omit net exports to get a closer look at actual domestic spending (i.e., C+I+G, or “domestic absorption,” as development economists call it), the growth of the rest of real GDP over the same span looks like this:
A much clearer picture: GDP grew slowly in the first two quarters of the recovery, and thereafter at a much faster clip, about 4%-5%. It looks to me like the domestic U.S. economy has been recovering a respectable pace in 2010. While net exports may continue to be a drag on the economy in the future, especially as our European trading partners opt for the bloodletting approach to their economies, their extreme fluctuation makes me leery of making a definite prediction about net exports. I feel safer in saying that consumption and investment seem to be leading the U.S. recovery and that investment will hopefully pick up further as more businesses come to believe that a genuine recovery is underway.