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Home Publications Blogs Beat the Press 1.1 Percent First Half GDP Growth is Not Much Grounds for Celebration

1.1 Percent First Half GDP Growth is Not Much Grounds for Celebration

Friday, 29 August 2014 07:12

The NYT had a piece on the upward revision of second quarter GDP data to a growth rate of 4.2 percent from 4.0 percent in the advance report. It would have been worth reminding readers that the jump was a reversal from a weather induced plunge of 2.1 percent in the first quarter. This leaves the economy growing at annual rate of just 1.1 percent for the first half of the year. Even if the growth rate is 3.0 percent for the second half that would still leave year-round growth at just 2.0 percent. This is below almost all estimates of the economy's potential which means that rather than making up ground lost during the recession, the economy is falling further below its potential level of output.

The piece also is a bit off in a couple of other areas. It noted the upward revision to investment and told readers:

"Since the economy emerged from the recession five years ago, companies have been hesitant to spend heavily on new capacity, but these figures and other recent data indicate that is finally changing."

Actually the revised 8.4 percent growth rate for investment is not especially impressive. There have been many previous quarters in the recovery where investment grew more rapidly. For example, in the second, third, and fourth quarters of 2011 investment grew at 8.8 percent, 19.4 percent, and  9.5 percent annual rates, respectively. As recenly as the fourth quarter of last year it grew at a 10.4 percent annual rate, so the most recent quarterly rate is not impressive, especially since it follows growth of just 1.6 percent in the first quarter.

One area where it paints an overly pessimistic picture is in reporting the split between wages and profits:

"Despite the faster overall growth rate, businesses still seem to be benefiting more from the economy’s upward trajectory than many individual consumers are.

"The revision on Thursday, for example, lowered the estimate of workers’ wage and salary growth slightly in the first half of 2014, with income rising 5.8 percent in the second quarter. Corporate profits, on the other hand, jumped 8 percent in the second quarter, the Commerce Department said."

The comparison with the first quarter is misleading. The profit data are always erratic and the first quarter showed a surprisingly large drop in profits. If the comparison is made with the second quarter of 2013 nominal before-tax profits are actually down by 0.3 percent. By contrast, labor compensation is up by 4.4 percent. These data are too erratic to make much of this shift, but the numbers actually suggest some redistribution from capital to labor over the last year.


Comments (4)Add Comment
written by Ryan, August 29, 2014 9:50
I'm sorry, but don't we get a piece like this once a year, at least? Are these writers so young that "light at the end of the tunnel" means nothing? Do they fire the entire writing staff every six months? This would explain why we've read the same story for several years.

Someone needs to coin an economic writer analogue to the Friedman unit!
Crumbs for the 99%
written by ifthethunderdontgetya™³²®©, August 29, 2014 9:52
These data are too erratic to make much of this shift, but the numbers actually suggest some redistribution from capital to labor over the last year.

If our population was not so efficiently divided against itself by our plutocracy, we'd have another revolution already.

The Powell Memo: A Call-to-Arms for Corporations


written by Vedicculture, August 29, 2014 2:16
It was more than 1.1%, much more. GDP accounting sucks and 2012 just waved(and I think it will be revised down a tad).
GDP account may be more than erratic and more than "sucks"
written by Blissex, August 30, 2014 6:29
«growing at annual rate of just 1.1 percent»
«These data are too erratic to make much of this shift,»
«GDP accounting sucks»

I think that most discussions based on the GDP are rather pointless because of a huge shift in the economy that happened in the past few decade and another more "political" reason.

GDP was supposed to measure gross *value added*; that is output minus inputs, but gross of depreciation (and adjusted for international commerce).

Output minus inputs is essential to avoid double counting; for example the sale of tires to car manufacturers needs to be subtracted, because the tires get sold again.

Subtracting inputs at each stage of production was and is relatively easy to do for agriculture and manufacturing, but very hard to define and measure for services and government. Most statistical agencies either make up the numbers for value added in services (and some say so in obscure footnotes) or "estimate" them using not very plausible schemes.

Also there is the question whether some services produce value added *at all*, or even produce *negative* value added, for example a lot of the financial industry.

Plus some service sectors seem to be in large parts producing inputs for other sectors; for example a large part of healthcare and training sales might plausibly be subtracted from GDP as being inputs to other industries, to avoid doublecounting. :-)

This is very relevant because:

* Advanced economies have gone from being 80% agriculture and manufacturing to being 80% services and government. This means that 80% of nominal GDP is in significant part arbitrary because of "estimates" that don't really solve the problem.

* Real GDP numbers are market-moving and vote-moving numbers, and therefore there is a very strong incentive to LIBOR'ize them, to nminal GDP or to the inflation index used, and what seem small changes like one percentage points can be actually huge (one percentage point is 50-100% of yearly growth).

* Financial markets have evolved in betting markets, where banks and hedge funds can bet large sums on any kind of event, in particular index related; this gives a gigantic incentive to traders to find way to LIBOR'ize any index on which they have placed bets.

There are other big issues with GDP, one being that a rather large component of it has been for quite a while the *booked* profits of financial services companies, and their accounting is probably extremely dubious (thanks to Congress and other regulators), because governments then get a very strong incentive to boost GDP numbers by permitting or encouraging massive accounting fraud to boost those booked profits, and to hide or postpone any relevant losses (for example by parking a few trillions of toxic securities in Special Investment Vehicles owned by central banks).

My guess on how much GDP is "managed" by national statistical agencies in first-world economies is that it is at least 2-4% for nominal GDP and 1-2% for the GDP inflation index. These are small compared to Argentina and China, but they are still significant. There is a case in other words that real GDP per capita has not really increased since 1980, and perhaps total GDP has not grown either, or much less than reported, as the enormous increase in *private* debt in the same period seems to suggest; for an extreme but plausible illustration this graph:


MY impression is also that the "managing" of nominal GDP and the GDP deflator by career-oriented/"sell-side" national statisticians and economists has been increasing over time, and this may be more significant than the absolute level of "management", because it makes comparisons across time difficult, like for example for the CPI or the DJIA or the SP500, where the way they are computed has changed so much that long-term graphs involving them are rather uninformative.

If one wants to discuss substantively using "managed" aggregate numbers like the GDP is not very instructive, and disaggregating them and drilling deeper probably is a lot more worthwhile.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.