Busy at a conference today, so I must be brief, but the growth in real GDP underwent a large revision for Q3 of this year: up to 3.6% from 2.8%. Sure, that good news, but it warrants a closer look, because it could easily, and mistakenly, get sandwiched into a “green shoots” narrative that would lead you to believe things are improving faster than they really are.
First, those are annualized quarterly growth rates, and especially when they’re driven by inventories–the most volatile top-line component of GDP–they’re noisy. So what you really want to do here is block out some noise and boost us some signal by taking year-over-year changes.
That’s what I do in the figure below, along with an average over this time period of the past few years. As you see, growth has flitted around a trend just north of 2%. That’s about the economy’s trend growth rate right now, and again, what’s wrong with the trend?
Well, I’ll tell you: we’ve settled into it–the trend, that is–too soon. We’ve yet to close the output gaps in either GDP or jobs that persist and continue to weigh on many households, for whom growth is more something they read about in the paper than experience themselves.
After such a deep recession, you want a “bounce-back” period before you settle into the pattern of trend growth in the picture. To be clear, I’d much rather be there than south of that line, but policy makers must not take too much solace from the trend when it really represents an unsatisfactory “new normal.”
Second, taking out the inventory build up, annualized growth for the quarter was 1.9%–again, right about trend. Typically, inventory buildup in one quarter is followed by draw downs in the next quarter, so again, while it’s very nice to see a “three” handle on today’s number, no one should be convinced yet that we’ve hit escape velocity.