If you’re anything like the nerd I think you are, today’s GDP report, with revisions back to the beginning of time—that’s 1929 in government accounting—is nothing short of fascinating. Not so much in that it changes the world as we knew it, though there’s a little of that, but just because of all the nuanced differences in how we conceive of and tote up that beast we call the US economy.
First, the headline stuff:
Today’s GDP report found the US economy expanding by a better-than-expected 1.7% in the second quarter of the year. That’s still just a moderate growth rate, and more importantly, since the quarterly numbers are jumpy, you get a more reliable read if you look at the year-over-year growth rates. They show real GDP up only 1.4% over the past year, a pace that’s similar to last quarter’s and a notable deceleration over the growth rates we were posting a year ago (see figure below).
Part of this is linked to fiscal headwinds. The revised data have the real GDP essentially flat at the end of last year, up 0.1% in 2012q4, with the government sector subtracting a big 1.3 percentage points from growth. And that was before the payroll tax increase and sequester took hold.
The absence of price pressures in today’s report supports the view that growth is moderate at best. The core personal consumer price index from the GDP report, closely watched by the Fed, was up only 0.8% on an annualized quarterly basis and 1.2% over the past year. There’s been a lot of talk about doves and hawks of late, and sure, inflation expectations are even more important to Fed policy makers than the actual growth rates. But the data in this report clearly support continued accommodation.
Net exports have also been a drag lately, subtracting just under a point from this quarter’s growth rate. I noted the President was touting the growth of our exports this week, and I’m with him all the way on the importance of that. But let’s stay real here: what matters for growth is the net. Don’t just tell me how many runs the Nats scored; you gotta tell me how the other team did too.
Bottom line, even if you want to go with the more volatile quarterly number (1.7%), we’re still struggling to grow at trend, which is around 2%. Now, you might be thinking, “what’s so bad about that—isn’t the trend your friend?”
It’s absolutely fine to grow at trend once you’re where you want to be. Think of it as an airplane leveling off at 30,000 feet. It had to climb to get there. In terms of the economy, after a deep recession, you have to earn your trend through a number of bounce-back quarters. That hasn’t happened yet. Trend growth pretty much ensures your unemployment stays about where it is, which is too high.
So, bottom line, the resilient US economy continues to expand, housing has become a reliable contributor to growth, and the much vaunted US consumer lives and spends on. But four years into a recovery that officially began in the second half of 2009, we’ve yet to achieve escape velocity from the residual pull of the Great Recession, in no small part due to austerity measures creating fiscal drag.
OK, what about those revisions back to 1929?!
Well, Dean Baker and I will have a lot more to say about that tomorrow. For now, consider this:
–the additional valuation of certain “intangibles”—technically “intellectual property products”—added 3.6% or $560 billion to 2012 GDP. Congrats, all!
–I know that sounds fishy, but there’s logic to it. We’ll explain its strengths, limitations, and implications tomorrow.
–The revisions lift the level of GDP but not the real growth path. Between 1929 and 2012, real GDP grew 3.3% as opposed to 3.2%, pre-revision. Even with compounding, that difference amounts to 9% more growth over more than 80 years.
–More recently, the revisions support the story I told above re today’s report: from 2012q1-2013q1, real GDP was up 1.3% revised, 1.7% unrevised.