Third Quarter Real GDP
(Not All Details are Bad)
The front page of today’s Wall Street Journal features a useful breakdown of the third quarter real GDP statistics. On the negative side, it shows that the strength in consumption spending benefited from various temporary government programs: primarily cash for clunkers and the first time home buyers’ credit. Those will eventually go away.
Showing imports as well as exports is almost a breakthrough since commentators typically focus only on exports as a positive to GDP growth. The chart showed exports as contributing 1.5 percentage points of the total increase of 3.5 percentage points. Fair enough. But it also showed imports subtracting 2.0 percentage points, making net exports (exports minus imports) a net drag of 0.5 percentage points.
It’s important to remember that imports are a subtraction from U.S. GDP numbers because the various categories of spending listed have import components that generate income abroad rather than at home. Imports are subtracted to prevent over counting in those other categories.
A very positive detail is the contribution of inventory investments. Inventories have been drawn down in recent quarters, and I was expecting a boost from some rebuilding of inventories in the third quarter. Instead, the boost came from a slower liquidation of inventories than in the previous quarter rather than a rebuilding. (A smaller minus has the effect of a plus.) The reason this is so positive, in my opinion, is that the rebuilding of inventories and its boost to GDP is still in our future. It will likely boost the fourth quarter GDP number; if not, the first quarter. It’s an ace in the hole.
I find it disconcerting that everyone seems to equate an increase in the GDP number as an end to the recession even though everyone expects employment to continue falling for some time. Falling employment is hardly consistent with a recovery in my book.
One might think me a killjoy for raining on the recovery parade, but I do believe too much positive spin on current numbers sets us up for disappointment in the near future. The stock market, in particular, swings up and down on exaggerated news spin. More realistic interpretation of incoming economic data might help the stock market have a slower, but more sustainable, increase.
But just to be clear: a 3.5 percent increase in the third quarter is a good thing.
It sounds like much of the 3.5% economic growth was in spite of government programs.
[...] fact that inventories are still falling is “a very positive detail” in the GDP report, says former Dallas Fed President Bob McTeer. “The rebuilding of inventories and its boost to GDP is still in our future,” he says, [...]
Oddly, a lot of media outlets fell uncritically for the government’s bravado of increased GDP. For our part, we commented immediately that the small increase must be related to mammoth government spending.
I agree with you. I think our economy is not yet recovering but more on stabilizing.
Hi Bill and Phil: nice question, wasner, and post. In the case of the USA, Prez Clinton managed a budget surplus for a bit over 2 yrs, killed the economy by sucking away private sector income and wealth, and the budget deficit was restored. Unfortunately, it was restored the ugly way through slow economic growth that lowered tax revenue. We then had a jobless recovery for many years. Because the budget stance remained tight all thru the Bush administration, our private sector had to deficit spend. This finally collapsed in 2007 and the rest, as they say, is history. Now we have the budget deficit exploding, in a particularly ugly way. It is cushioning the downturn but Americans are now too scared to spend. Unfortunately the Obama admin does not understand MMT and so refuses to take decisive, progressive action. We will, of course, eventually recover because the budget deficit will continue to grow. But meanwhile we are 25million jobs short. Too much suffering. It could get a lot worse before it gets better.
Dear RamananYou noted:The NCB can indirectly hsacprue government bonds in an immoral-but-legal way. An NCB’s acquisition of government bonds at an auction can utmost match maturing holdings. The workaround is that the NCB can set-up a kind of (multiple) transaction(s) where an “eligible counterparty” can be lent funds for collateral. The counterparty can then use these funds to hsacprue government bonds at the auction and sell it to the NCB. So, the first leg is funds for collateral, the second leg is collateral for securities – slightly different from a repurchase agreement.The NCB faces no issues as far as the ECB is concerned, because the ECB is not involved in this transaction as the NCBs are fully allowed to expand their balance sheets. The only question here is that of politics. The ECB may not like these things but it is totally legal.Then you quoted the famous Article 101.1 of the consolidated Treaty, which has been interpreted as applying to activity in the primary bond markets and not the secondary markets. So NCBs are not allowed to lend to their governments directly or buy government debt directly. That is clear.It is also true that they can hsacprue the debt in the secondary markets if the government can issue its debt in the first place. So it doesn’t even have to be as sneaky as you suggest. The NCB has the right to hsacprue debt and does so often.But it is not just a question of politics as you suggest that they would not do this infinitely. While the NCBs can extend loans under certain conditions and therefore increase the monetary base, they are legally obliged to work within the Euro system charters to target price stability and so that process is finite.Further, similar to the US or Australian system (or most other systems) it is ultimately the Treasury in the EMU system that will guarantees the NCB will not become insolvent. All risk in the EMU is pushed down to the national level. The ECB carries no responsibility for losses made by the NCBs. However there is a major difference between the US/Australian system and the EMU the central bank carries no credit risk in buying government debt in the former cases but is exposed to credit risk in the EMU because its ultimate guarantor can go broke if it is unable to continue financing its operations. So a central bank will be reluctant to enter a partnership (via the secondary markets) to keep buying the debt of a government which is under solvency pressure.After all, the EMU rendered these banks the most independent of all central banks.So yes they can expand their balance sheets by buying assets in the secondary markets which keeps them inside the rules related to Article 101 but that process is finite and may not be sufficient to save a national government from default. That is the major difference between a sovereign monetary system and the EMU.best wishesbill