The 4Q GDP “Statistical Recovery”

There’s been a lot of talk about the 4Q GDP release which showed it grew at a 5.7% seasonally adjusted annual rate (SAAR). From the Bureau of Economic Analysis release:

Real gross domestic product — the output of goods and services produced by labor and property located in the United States — increased at an annual rate of 5.7 percent in the fourth quarter of 2009, (that is, from the third quarter to the fourth quarter), according to the “advance” estimate released by the Bureau of Economic Analysis. In the third quarter, real GDP increased 2.2 percent.

So yeehah, it grew. Third quarter GDP showed growth, too. But was revised downward twice. The first release said it was a 3.5% SAAR, then it was revised to 2.8% and then finally to 2.2%. But let’s take a look at the SAAR chart:

But we don’t think of GDP in terms of seasonally adjusted annual rates measured each quarter. Economists might, but most economists don’t make any sense. We think of economic activity in terms of the buildings we see get built, how much things cost this year vs. last year, or the number of people we see shopping this month vs. the last month or the month before last. Point is, we use our eyes, our ears and our surroundings. Not two-dimensional charts like I just used.

But there’s one kind of chart I use: a year-over-year percentage change chart. And that one tells us a much different story:

This tells me that GDP was flat year-over-year.

Flat. No growth. Zilch. Nada. Zip. A big fat zero.

But how do we account for GDP? Here’s the basic equation I found over at Wikipedia:

And in the way GDP is accounted for, the one thing that has the biggest effect on GDP is savings and investment. Consumption may be the largest component, but it’s just purchases. There’s no effect on growing GDP. The component that has the biggest effect on growth is investment. So here’s a chart that looks at year-over-year changes in investment:

That isn’t good no matter how you look at it. All this tells me is that the change in private domestic investment is less negative. So think of a stone sinking in water vs. a 2-ton automobile sinking in water.

So there you have it. But of course, it’s not as simple as creating incentives for investment. For investment to work, there has to be an expectation of positive returns over time on the investment. And in order to do that, we have to make sure conditions are fertile for that kind of investment.

But until the composting process of the last cycle is complete, it won’t happen. In fact, some of our government policy is probably slowing this process down.

So until then, all of the stimulus, all of the spending amounts to us just pushing on a string.


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Filed under finance, government, macro, Way Forward

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