That big GDP number! (And the Dow breaks 9.798!!)

December 23rd, 2014 at 11:15 am

Real GDP was up 5% last quarter on an annualized basis, the strongest quarter in over a decade according to the final revision from the BEA. And that’s on the heels of 4.6% growth in the prior quarter. As the BEA put it, pretty much all cylinders were firing in the Q3:

The increase in real GDP in the third quarter primarily reflected positive contributions from [consumer spending], [business] investment, federal government spending, exports, state and local government spending, and residential…investment. Imports, which are a subtraction in the calculation of GDP, decreased.

But you know my methods, Watson. I’m all about the bass longer-run changes to smooth out the quarterly noise. The figure below shows both quarterly changes (annualized) and yr/yr changes; note how the latter is a smoother version of the former. There’s a small tick up at the end of the smoothed series, with real GDP up 2.7% in 2014Q3 compared to the same quarter last year. We’ll see if it holds.


Source: BEA

Of course, one factor powering the growth acceleration is the decline in energy prices. In fact, as the figure below reveals, on a nominal basis (before inflation) GDP actually grew more slowly in Q3 than in Q2, 6.4% versus 6.8%. But because prices fell faster last quarter, real growth accelerated. BTW, it’s not just oil either. The core consumer price index (sans energy and food) in today’s report–the Fed’s key inflation benchmark–was up a measly 1.4% in Q3 compared to 2% in Q2.


Source: BEA

Again, we don’t want to cherry pick jumpy quarterly numbers, but the punchline seems awfully clear: solid, accelerating growth with no obvious price pressures. I’ll have a bit more on that later in the day, but inflation hawks, pull in your talons. No one’s saying prices won’t be an issue at some future point, but for now, nothing to see…move along, please.

Coming off the strong GDP report, solid profits, anchored prices, how well we’re doing relative to everyone else, and mainly, whatever manic forces drive daily equity indexes, the Dow cracked 18,000 today, or as I like to call it 9.798, since I think natural logs provide a clearer picture of proportional movements in the index.

Now, if only we could start seeing a bit more of that GDP and market action in workers’ paychecks.


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2 comments in reply to "That big GDP number! (And the Dow breaks 9.798!!)"

  1. David Bass says:

    Just curious, Jared… why use natural logs in this applications, rather than base 10 logs? Either one will give the same clarity of picture, but more people have memorized the powers of 10 than the powers of e, although you are to be highly praised for doing the latter.

    • Jared Bernstein says:

      Um…I use a calculator. Economists love the natural log as its changes are close to percent changes.