A GDP numbers game is in full swing in the press. Is the US economy growing? Slower? Faster? The fellow who gets sick and loses 50 pounds regains that weight when he heals. The gained 50 pounds is simply a return to normal. But when it comes to GDP and the press and politicians, only God knows what is happening behind the curtain.
The best way to understand what is happening is to go behind the curtain. In this case, I went to the Bureau of Economic Analysis, the BEA, for the raw GDP numbers by quarter. https://apps.bea.gov/iTable/iTable.cfmreqid=19&step=2#reqid=19&step=2&isuri=1&1921=survey
The numbers presented below are for chained or real GDP. These numbers represent how much of GDP's growth is from higher quantities produced of goods and/or services. It "removes" any price changes from the data. When Real GDP grows you know the pile of goods and services produced is getting larger.
Pre-pandemic, in the fourth quarter of 2019, real GDP stood at $19.3 trillion. By the middle of 2020 it had declined to $17.3 trillion. That's a decline of $2 trillion dollars in half a year. Since Q2 2020, real GDP has been rising. But by Q1 of 2021 it had not returned to its former high. Q1 came in at $19.1 trillion. That's close but no cigar. We expect that by Q2 2021 real GDP will be back to where it was before the pandemic hit.
That means it will have returned to its former self in about 6 quarters. Of course, that's nothing to celebrate since that means that over the past 1.5 years the growth of real GDP will have been about zero.
But wait, What about the press? The above story would put even Nolan asleep. What the press is harping on is the re-gained 50 pounds from above. But that's stupid, if not misleading. The story is really that we likely will have had zero economic growth for about 1.5 years.
You beg to differ. As we move back to a normal real GDP number, you say, that's a lot of pressure on an economic system, especially one with supply constraints. But surely that is a temporary issue that will heal itself. As it becomes more clear that a recovery is underway, surely supplies will line up. Maybe inflation will burst a bit for a moment, but the underlying truth is still there. We are headed back to whence we came. We are basically headed back to 2019.
If you are boring enough to be a regular reader of this blog you will see that I have pontificated about the danger of rising inflation. So let's be clear. Now is a great opportunity for Joe and his buddies to start removing stimulus. If he doesn't, then what seems like returning to normal will be met with a storm of increased spending. Normal output will be met with a growing tidal wave of demand and will surely lead to more sustained inflation.
Some times it helps to dig a little deeper and it often improves your sleep. Real GDP has a lot of components. Let's take a quick look at some of them to see what's growing and not.
The numbers below show how much each category of real GDP changed from pre-Covid to Q1 2021.
Households are leading the return with spending on consumer goods and houses.
Businesses, in contrast, have reduced spending on business structures and are getting less attention from the rest of the world
Consumer goods +24%
Residential Structures +14%
Business Equipment +4%
*Government defense spending +3%
*Government non-defense goods and services +2%*
Imports -1%
Consumer Services -6%
Exports -11%
Business Structures -16%
*Note that these categories are not the whole amount of government spending. It only includes government spending on goods and services. Government spending on transfers -- where they essential transfer money to households (e.g. entitlements) -- is not included here. I suspect that would be a very large positive number but it doesn't belong in the GDP statistics.
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