Tuesday, August 18, 2015

Lesson 7 GDP: Hitting on Fewer Cylinders

GDP makes my heart flutter.  GDP is to macroeconomics as corn and oak barrels are to bourbon. Each quarter the Bureau of Economic Analysis publishes data on US GDP along with revisions of many of the numbers for past quarters. These announcements generate a lot of oohs and ahhs. Most of us want a bigger number each quarter because it shows how sexy we are as a nation. A higher GDP means our nation produced more stuff. That usually means more people were employed, companies made better profits, and Donald Trump passed more gas. In quarters when GDP slows or declines, we have sad faces and we ask friends and relatives – what did we do to deserve such a fate?

So when the latest numbers came out recently for Q2 2015, I decided to see what’s up. Like you I know that the US economy is not growing as fast as we want it to grow. I know that because Joe Biden said so. Also the stock market said so and has been side-ways waffling as it tries to decide if we are ever going to grow as in the good old days when Gene Autry rode Lassie. For example, in the 8 years from 2000 to 2007 the average annual growth rate of real (as opposed to unreal) GDP was about 2.5%. Although that was nothing to write home about, real GDP rose by an average of only 1.1% in the following 8 years – from 2008 to 1015. Both time periods included recessionary quarters.

If you are good with numbers you realize that 1.1% is less than 2.5% and that makes for a lot of unsmiley faces on the BEA’s Facebook account. If you are even better with numbers you could proudly announce that our national growth rate was only about 44% of what it was. Clearly we have been experiencing a prolonged slowdown.

This post is not about blame though I do blame a lot of people. You can ask my spiritual advisor/bartender about all that. What this post is about, however, is looking deeper at real GDP to see if we can identify weak spots. The IU football team has a weakness in the defensive secondary such that even when the offense scores 179 points against any opponent, we always lose in the last seconds on a Hail Mary Pass. By focusing on the weak spots we might be better able to understand why we are doing so poorly.

There is more than one way to look more deeply at real GDP. Today I am looking at the buyers of all that stuff we produce. The BEA breaks down the buyers into four groups – shirts, skins, stripes, and plaids. No that’s not right. The four key buying groups are households, firms, governments, and foreigners.

Average values of GDP contribution for the two eight year time periods are found in the below table for key GDP components by purchaser.  These contributions are measured in percents but are not the percentage change for the category. These contributions show how much GDP would have grown in that time period were it only for that one component. 

For example, from 2000 to 2007 of those 12 categories, Spending on GDP for Consumer Services accounted for GDP growing by about 1.14% over those eight years. Since GDP grew by about 2.5% per year, spending on consumer services alone accounted for a little less than half of that growth.  There were six buying categories that made major contributions well above zero percent.

Now let’s see what changed in the next eight years. Recall that real GDP grew by only 1.1% on average from 2008 to 2015. Consumer services alone accounted for .56% of that. That is a healthy share but notice that it is half the 1.14% of the previous eight years.

More strikingly is that only three other sectors were supporting 0.10% or more growth per year from 2008 to 2015. In 2000 to 2007, 8 buying groups accounted for .10% or more points of GDP growth. Growth has become much less balanced from 2008 to 2015. The household is driving the wagon, albeit slower. Business firms are smoking Js in the back. The government seems more willing to increase transfer payments than spend more on goods and services.

Worse, most of these buying groups contributed much less to GDP growth in the last eight years (compared to the previous eight years)
58 points less for Consumer Services
29 points less for Consumer Durable Goods
25 points less for State and Local Governments
21 points less for Consumer Nondurable Goods
18 points less for Federal Government Spending on National Defense
13 points less for Business Equipment
12 points less for Business Structures
  9 points less for Exports to Foreign Buyers

What can we make of this? Economic growth continues to be disappointing because we are not spending.  We are essentially hitting on no cylinders because the weakness comes from households, firms, governments, and foreign buyers. We have this widespread lackluster performance despite strong government stimulus and a central bank that keeps interest rates at zero. As government spending turns away from military and other goods to social programs the impact of government at all levels of GDP seems to be lacking. More worrisome is the behavior of businesses. Why are they so unwilling to bet on a vibrant future? 

Contribution to Real GDP
       00-0         08-15        Change
        Durable goods
        Nondurable goods
         Intellectual property products
        National defense govt
        Nondefense govt
        State and local govt

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