Autarchy in the US

(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):

-1.37 1.90 -0.31 -3.50 -1.76

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:)

1.6 5.0 3.7 1.7 2.5

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:

3.0 3.1
4.0 5.2 4.3

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.

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2 Responses to “Autarchy in the US”

  1. Ranjit Says:

    P.S. Excluding net exports’ Percent Contribution to Real GDP back to 2007, i.e. to the beginning of the recession, also gives a clearer picture of the recession than just looking at the percent change in real GDP in each quarter:

    Looking at the percent change in the standard measure of real GDP, including net exports (NX), we see that it fell in just five quarters, not all of them consecutive: 2008:I, 2008:III-2009:II. If we apply that rule-of-thumb (more like thumbnails on a blackboard, in my opinion) definition of a recession a two or more consecutive quarterly declines in real GDP, then the recession did not begin until July 2008 and lasted just one year. That’s considerably shorter than the NBER’s official dating of the recession as December 2007 – June 2008; to me the NBER’s dates are a lot more like it. The rising unemployment rates of 2008-2009 also closely track the NBER’s dates.

    Looking at just C+I+G, however, the declines parallel the NBER-dated recession exactly: the first quarterly decline is in 2007:IV and C+I+G falls in every quarter from then through 2008:II. We also see more extreme falls in C+I+G than in GDP when the economy was falling fastest, namely in 2008:IV-2009:I: about 8% in each quarter versus 7% and 5%.

    I’m not suggesting we toss NX out of GDP or use C+I+G in all cases, but I do think trends in C+I+G give a less noisy indication of what’s going on in the macroeconomy. I’m actually not sure why development economists use C+I+G and why domestic macroeconomists generally don’t.

  2. If we make it through December « Blogging Through the Wreckage Says:

    […] Blogging Through the Wreckage An econ professor tries to get a grip on the economic and financial crisis « Autarchy in the US […]

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