Real GDP was up 3.3% in the 2nd quarter. That's more than most expected. Certainly not what you'd expect to see in a recession. It should be noted that this is not a clean bill of health for the economy. It would be premature to say that we're out of the woods. However, if this is a recession, it would be a pretty unusual one. As King Banaian put it a couple days ago in response to labor market news, "If it be recession, it be wimpy." And so today's news further complicates the picture.
Just what I needed as I sit in contemplation as I prepare to write about the local economic outlook.
The Wall Street Journal's Real Time Economics blog makes the following observation:
But the forecasts of a shrinking economy may not be so far off the mark after all. Gross domestic income, which Fed officials have in the past highlighted as perhaps a better measure than GDP, advanced just 1.9% at an annual rate last quarter after contracting the two previous quarters. Thursday's report is the first to show first quarter GDI in the red.
...
GDP is a consumption-based measure, adding up consumer, business and other spending and investment as well as net exports. GDI is income-based, adding up things like personal income and corporate profits. GDI is included in quarterly GDP, but not in the first, or "advance," estimate, so Thursday's report was the first for second quarter GDI.
In theory, the two should equal each other, but they don't always. In recent quarters, net exports seem to be the main reason, since they flow directly into GDP but only indirectly into GDI. In addition, GDI more heavily reflects corporate profits than GDP does.
Before-tax corporate profits grew slightly in the second quarter after falling the previous two quarters. The difference between GDI and GDP is more than just academic.
In a Fed paper released last year, Fed economist Jeremy Nalewaik wrote that "real-time GDI has done a substantially better job recognizing the start of the last several recessions than has real-time GDP." Fed officials have even taken notice. According to the Fed's May 2007 meeting minutes, when economic data were giving mixed signals on the economy's underlying state, Fed officials "discussed how best to reconcile the slowdown in output growth over the past year with the relatively strong performance of the labor market."
"This apparent tension could partly reflect measurement issues; in particular, participants noted that the more-rapid gains in estimates of gross domestic income over this period might better capture the pace of activity than the modest advances in measured GDP," the minutes said.
Now that the two measures have flipped with GDI lagging, it seems likely that Fed officials will now take 3%-plus GDP growth with a big grain of salt.
True. One other thing to consider is how much the weakening dollar is helping GDP by reducing the trade deficit. Exports are growing rapidly while (real) imports are shrinking. The real trade deficit (quarterly SAAR) is about a third less than it was a year ago. That's pretty significant, and definitely accounts for some of the increase in GDP.
In fact, the contribution of net exports to real GDP growth last quarter was 3.1%.
Out of 3.3%.
While I still think that the Fed's next move will be to raise interest rates rather than lower them, I admit to being a little concerned that a rate hike too soon might strengthen the dollar before we're ready.
Mark Thoma has more.
Leave a comment