Real GDP is the measure of a nation's output. Real GDP was recently announced for the US for 2019. Depending on the view presented, output rose either by 2.1% or 2.3%. That doesn't sound like a large discrepancy. Either way, 2019 looks pretty anemic when compared to the past. While anemic, it was not a recession, and so many of us are happy for that.
As the table below reveals, if you dig down a bit, there is much more to the differences for 2019 than the 2.1 v 2.3 shows. These differences are more than academic. The differences may give us some insight into 2020.
Why differences? At the end of each year, the Bureau of Economic Analysis presents two ways to describe economic change within the year. The first is called year-over-year growth. Call that YOY. YOY is obtained by averaging the GDP growth rates of the four quarters of each year. Underline the word average. To get YOY 2019, you take the average of the four quarters of 2019 and compare that to the average of the four quarters of 2018.
As such, YOY 2019 does not emphasize change in any one of the quarters of the year. It averages them. It is equally using, therefore, eight quarters of change.
The second way to describe growth in 2019 is to use only two quarters -- you look at the change in real GDP from the fourth quarter of 2018 to the fourth quarter of 2019. You don't give a peep about the other six quarters. For example, if growth in GDP was low in the fourth quarter of 2018 but it popped really high in the fourth quarter of 2019, then you might get a very large 4Q to 4Q growth rate in that case. The average of all four quarters for both years might be exactly the same. But because of the special changes in those two terminal quarters, you might get an eye-popping rate of change. YOY in that case would be zero, while 4Q to 4Q might be large.
Such fourth quarter end of year activity doesn't always act so crazy. When it does, you can be sure that the YOY and 4Q to 4Q measures will differ.
Which one is right? Neither. They are both right, just as your left side with the mole and the right side without the mole are both right. They are both you.
Some of us think it is very important to see where we have gotten during the year. How the year ends is very important to you. Thus 4Q to 4Q is preferred. More often, we want to compare the whole year. How much stuff did we produce in 2018? How much in 2019? How much bigger is that total pile in 2019? In that case, YOY is preferred.
Okay -- I hope I helped you get much needed rest and a good nap. Why does this matter? 2.1 versus 2.4. Who cares?
Look at the table below. Look at real GPDI -- this is a critical component of national output that measures housing construction, and spending on plant, equipment, and software. Notice the difference there. YOY says 1.8%. 4Q to 4Q measures -6.1%. That's quite a difference. Activity dramatically tailed off in the fourth quarter of 2019. Drilling down further, you see that was the result of declining production of structures and equipment despite a strong fourth quarter increase in the building of residences.
So what? Structures, which includes building manufacturing plants, and equipment are two sectors responsible for growth in productivity and competitiveness. Maybe those sectors did okay in 2019 but clearly they tailed off at the end of 2019. Does the end of 2019 herald something coming in 2020? If we focused only on YOY, we would never have seen the tailing off and we would have had a very different picture of 2019. Of course, the fourth quarter performance might have been a random event -- maybe it was weather?
You also see that imports and exports of goods declined dramatically from 4Q to 4Q. But we know that is the result of a trade war, a trade war that may or may not be finished after the fourth quarter of 2019.
Which profile is right? They both are. Which one gives us a better indication of what might happen in 2020? We don't know. But having both YOY and 4Q to 4Q gives us more to go on and to think about. To me, the generally slower results for 4Q 2019 are something to follow and might indicate more of the same in 2020. Stay tuned.
Percentage Change in Real GDP 2019
Year over year vs 4th quarter to 4th quarter
YOY 4to4
| Gross domestic product (GDP) | 2.3 | 2.1 |
| Personal consumption expenditures | 2.6 | 1.8 |
| Goods | 3.8 | 1.2 |
| Durable goods | 4.7 | 2.1 |
| Nondurable goods | 3.3 | 0.8 |
| Services | 2.1 | 2.0 |
| Gross private domestic investment | 1.8 | -6.1 |
| Fixed investment | 1.3 | 0.1 |
| Nonresidential | 2.1 | -1.5 |
| Structures | -4.4 | -10.1 |
| Equipment | 1.4 | -2.9 |
| Intellectual property products | 7.7 | 5.9 |
| Residential | -1.5 | 5.8 |
| Change in private inventories | .............. | .............. |
| Net exports of goods and services | .............. | .............. |
| Exports | 0.0 | 1.4 |
| Goods | 0.2 | -1.1 |
| Services | -0.4 | 6.4 |
| Imports | 1.0 | -8.7 |
| Goods | 0.2 | -11.6 |
| Services | 4.1 | 4.3 |
| Government consumption expenditures and gross investment | 2.3 | 2.7 |
| Federal | 3.5 | 3.6 |
| National defense | 4.9 | 4.9 |
| Nondefense | 1.6 | 1.6 |
| State and local | 1.6 | 2.2 |
Really interesting! Historically how are these data points figured? They can't change the method each year or we would have no data confidence. Care to comment on the inverted yield curve now to further point to the future?
ReplyDeleteThank you Tracey. The Bureau of Economic Analysis in DC collects data from firms and other places to put together the figures. These are career government experts who do the best they can with a very difficult process. The BEA is not political. As for the yield curve today, it's full of noise. The economy is still strong enough to keep short rates from plummeting. Other risks and now the Coronoavirus are impacting longer term rates disproportionately. That's not a very complete answer but I think it highlights the main factors for now.
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