Posts Tagged ‘real gdp’

Butter before guns

30 January 2013

George F. Will once wrote, “All economic news is bad news. All economic news is good news.” Today’s GDP report has lots of both and has already sown a lot of confusion. Real GDP fell in the last three months of 2012, indicating a recession (although the drop was only 0.1%). Part of the decline came from reduced inventory investment, i.e., from companies not producing as many goods that haven’t been sold yet. So far, so bad.

The biggest decline came in government spending; in particular, military spending dropped a whopping 22%. Why? The Washington Post’s Brad Plumer says it has something to do with the drawdowns in Iraq and Afghanistan and apparently also with the various budget games that the Pentagon and other government agencies play, as regards the timing of the fiscal year and the “sequester” budget cuts that could come if Congress fails to raise the debt ceiling. One thing I learned from Plumer’s piece is that, although the 22% drop is unusually large, it’s not unusual for defense spending to drop in a particular quarter. It did so in about half of the twelve quarters from 2010 on; the second-largest drop was almost 15%.

Many people would view the big reduction in military spending as a good thing — the wars are unpopular, and some studies have found that, dollar for dollar, domestic government spending tends to create more jobs than does military spending. Aside from military spending, real GDP rose in the last quarter of 2012, by 1.3%.

Is 1.3% good? Of course not. It makes 2012:IV one of the weaker quarters of the past two years, in which the economy’s average annual growth was 2.0%. The economy grew at 3.1% in the third quarter of 2012, so this is a step backward at least in a relative sense.

But positives are not hard to find in the GDP report. Thus Bloomberg’s headline “Growth Stall Obscures Consumer, Business Pickup.”  Consumer spending grew at a decent 2.2% clip, up from 1.6% in the third quarter. Rising auto sales were a big part of the increase (which sounds about right to someone like me who bought a car for the first time since 1999). I would guess that some of the slippage in inventory production was simply due to consumers buying more goods than anticipated, with the result that inventories were down. (If inventory production had not fallen, then GDP would have grown by 2.6%, according to the Bloomberg article.) The best news of all was probably on the housing front, where residential construction (counted in the “Investment” part of GDP) grew by 15%. For 2012 as a whole, housing construction rose 12%, its biggest increase since 1992.

The markets seem to have to shrugged off the report. Market participants may doubt that the increased consumer spending and construction are sustainable. Right now, five hours after the release, the Dow, S&P 500, and Nasdaq averages are basically unchanged (within 0.05% of yesterday’s close).

Taking their chances on the wall of debt

29 July 2011

This morning’s surprise news is that, after last night’s fiasco in which House Speaker John Boehner could not round up enough votes for his own deficit reduction plan, 10-year Treasury bond prices are not only not down, they’re actually up, by a good bit. Interest rates on Treasuries, which move in the opposite direction as T-bond prices, are down 10 basis points to 2.84% (as of 11:14 a.m.). What gives?

Well, for one, the bond market may not have been expecting much from Boehner. The media had already been saying that he’s a much-weakened House Speaker, after watching his failure to rein in his Tea Party faithless. And any House Republican plan would likely be dead on arrival in the Senate anyway.

Another possibility is that as it becomes more likely that the government bumps up against the current debt ceiling on Aug. 2, that counterintuitively, T-bonds might actually be seen as safer, as Chris Isidore writes in CNNMoney. Why? Because the single biggest actor on the U.S. economic stage, the federal government, would be officially dysfunctional, even more so than it is now. Today through Aug. 1, at least, the government can meet all of its financial obligations. If Aug. 2 is indeed D-Day, then on Aug. 2 the government becomes a deadbeat, at least to somebody. And quite likely, it would not be T-bondholders. This assumes that (1) the government would still be allowed to issue more debt in order to pay off its maturing debt and (2) the Treasury would prioritize the interest on that maturing debt above its other obligations. As notes on NPR this morning, most commentators seem to agree that it is in the national interest to not stiff any of our bondholders, as an actual default would surely cause interest rates to skyrocket. If Aug. 2 is the beginning of Treasury triage time, then the government would more likely stiff someone else, like government employees (please please start with members of Congress!) and government claimants who lack political clout (i.e., not seniors or the military). This creates a lot of chaos, as people don’t know when they’ll be paid, which makes them less likely to spend or repay money and creates pressure on credit markets. In sum, the market reaction may just be the usual “flight to safety” that occurs when markets think conditions are about to get worse and also more chaotic. This would be consistent with the beating that stocks have been taking lately.

It may also be that the bond market is reacting to other news, like the dreadful GDP figures that just came out today. Real GDP in the second quarter grew just 1.3% (worse than the consensus forecast of 1.8%), and first quarter growth was revised drastically downward to 0.4% (from 1.9%). These numbers are “growth recession” territory (where the economy grows but not fast enough to generate enough jobs to keep unemployment from rising), consistent with the rise in unemployment (from 9.0% to 9.2%) over the last few months. As with the debt-ceiling brinkmanship, these new signs of economic weakness are a plausible reason to pull money out of stocks and put it into Treasury bonds.

But why Treasury bonds, you ask, and not another safe haven? The simple answer seems to be that there are woefully few alternatives. As Isidore puts it:

‘U.S. Treasuries are such a massive market — about $9.8 trillion — that they dwarf the markets of other so-called “safe havens” such as gold, top-rated corporate debt or the bonds of other countries with AAA ratings.’

So worldwide investors still like their chances on the wall of debt that is U.S. Treasuries.

P.S. Richard Thompson’s duet partner here is not Linda Thompson, but Christine Collister.

Autarchy in the US

23 November 2010

(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.