Three Four Important Points From Revised 2d Quarter GDP

- by New Deal democrat

The release of revisions to second quarter GDP this morning give us our first look at Gross Domestic Income and Corporate Profits after Taxes.

Gross Domestic Income is important because it is the other side of the ledger of GDP. Theoretically, the two should always be equal, but because they are calculated from separate data, there usually is a discrepancy. But more importantly, if there is a divergence between the two, it is more likely for GDP to move towards GDI than the other way around. This morning we learned that 2nd quarter 2013 GDI was up 2.5% at an annualized rate, compared with +2.4% in the first quarter. Here is the most current graph through the first quarter:

Although this hardly shows strong growth, it also confirms that the economy is still growing, and unlike the initial GDP estimate (also revised upward to +2.5%), it does not show any sign of stalling over the last three quarters.

This morning's release also included corporate profits after taxes and inventory adjustments. This is a long leading indicator. It tends to peak at least a year before the onset of any recession. Although profits declined slightly in the first quarter, as shown in the graph below:

they rebounded strongly in the second quarter to a new record of $1863 billion. Of course, while that may negative recession, it also does nothing to address the glaring inequality between capital and labor's share of income in this country.

The final point is that, while it is welcome that 2nd quarter GDP was revised higher, once again state and federal contributions to GDP were revised lower, and both were outright negative. Federal spending subtracted -1.6% in the second quarter while state and local spending decreased -0.5%. The total subtraction from all government expenditioures was -0.9%. Sequestration and austerity are having a real and negative impact on the economy.

Bonddad here:

Consider the following chart, culled from the latest GDP report, that shows the percentage change in exports from the previous quarter:

I've drawn an arrow about the latest quarters numbers. Total exports increase 8.6%; shipment of goods increase 10.1% -- the strongest jump since 4Q210.  And the export of services increase 5.2%.  The increase in exports were a primary reason for the upward revision in US GDP:

The acceleration in real GDP in the second quarter primarily reflected upturns in exports and in nonresidential fixed investment and a smaller decrease in federal government spending that were partly offset by an acceleration in imports and decelerations in private inventory investment and in PCE.

Recent Census data shows there was a drop in exports at the beginning of the 2Q, but that most categories of exports have increased since April:

US GDP Growth Since 2009; Investment

The above chart shows the quarter to quarter percentage change in GDP and the contribution from investment.  Here we see a somewhat spottier contribution rate.  There are five quarters where investment contracted-- obviously slowing growth -- and several quarters where investment's contribution was a fairly small. 

The above chart shows the percentage contribution of non-residential (business) investment.  Commercial real estate (dark blue) was negative until 2Q10.  However, once it turned positive it still didn't add much to overall growth.  Equipment (gold) added a great deal to growth for 6 of the 7 quarters mid-way through the expansion.  However, this type of investment dropped off in the last 6-7 quarters.  IP added a touch, but very little overall.

Residential investment can be broken down into two periods.  For the first half of the recovery we see a strong contraction for obvious reasons.  However, for the last seven quarters we see a decent amount of growth in this area.

Overall investment,  as shown in the top chart, has been fair this recovery.  All of the various components have done their part.  However, the overall level is still a bit low at the macro level. 

US GDP Growth Since June 2009; PCEs

According to the NBER, the recession ended in June 2009.  The above graph shows the quarterly percentage change in growth since 2009 and also shows how personal consumption expenditures have added to that growth.  What we see is a fairly consistent pattern of PCEs adding to GDP growth since 3Q09.

Let's look at the components of PCEs:

Above is a chart that shows the percentage change in the three main PCE components: durable goods (blue), non-durable goods (gold) and services (light green).  Service consumption (which accounts for about 65% of PCEs overall) has been strong since 1Q2010 while durables (which account for about 10% of PCEs) have been strong for five of the last six quarters.  Non-durables have been pretty weak throughout.  

Yes the Sequester and Federal Policy Is Hurting Growth

Let's review some basic economics.  The GDP equation is C+I+X+G=GDP, where C=consumer spending, I=investment, X=net exports and G=government spending.  Therefore, according to basic math government spending is a component and a necessary component to the economy.  And no, it's not a call for a return to a totalitarian state economy where all decisions are handed down in a 1970s style Soviet state.  But it is a simple acknowledgement that government policy can and usually does play a positive role in economic development.

Jeff Frankel:

GDP growth has fallen well below 2% in the last three quarters.   But I think we know the reason for that:  dysfunctional fiscal policy.  Washington has been the obstacle to a normal robust recovery, through a combination of such factors as spending cuts since 2011, the expiration of the payroll tax holiday in January 2013, the sequester in March, and now business uncertainty arising from new time-bombs in the next two months, once again the needless result of partisan deadlock over passing a budget and raising the debt ceiling.  Given all that, it is surprising that private consumption and investment have held up as well as they have.

Let's look at the data.

As the chart above shows, government spending added to growth in 2009 and 2010.  While some will may note the contribution was small, it's important to remember that the actual amount of the stimulus was in fact small; of the $800 billion total , approximately half was tax cuts while the other half was actual spending increases.  In fact, the stimulus was in fact too small given the size of the contraction.  Professor Krugman:

In practice, it was even worse, because one of the key elements of the plan — aid to state and local governments — was cut back sharply in the Senate. We ended up with only about $600 billion of real stimulus over that two-year period.

So this wasn’t a test of fiscal stimulus, even though it has played out that way in the political arena: the whole thing was obviously underpowered from the start.

Let's fast forward to 3Q11 when we start to see incredibly stupid budget shenanigans occur in Washington followed by the implementation of the sequester in 4Q12.  Notice for these quarters we see the federal government's contribution take away from overall growth.  And as Frankel points out, for the last three quarters the real effects of the sequester really start to bite in a statistically significant way.

1955: GDP Overview

This post is part of the Bonddad Economic History Project.  The purpose of this is to go back through the US' economic history and see what happened in each year starting in 1950.  I have links on the side of the blog to previous years writings..

Overall, 1955 as a very good year.  Growth started out strong, coming in at a 12% pave in 1Q, and then slowing at year end, but still coming in at a 2.2% pace.  Throughout the year, PCEs were a primary, driving force of the economy, usually accounting for at least 50% of total growth.  Also note the strong contribution from domestic investment in the first two quarters.  Government spending -- which contributed a large amount to the early decade growth actually subtracted from growth for three of the four quarters.  Finally, exports are also starting to subtract from overall growth during this time.

Let's turn to some of the charts from the Economic Report to the President:

The top chart shows that non-federal outlays were the primary source of growth in 1955, while the bottom chart shows that non-durable goods and service expenditures drove growth, along with business investment.

This shows shows a few important points.  First, in 1953, the Korean War ended, dropping federal spending.  As such, that part of GDP growth slowed.  In its place, we see PCEs and business investment rising, essentially taking the place of weaker federal government spending.

1954: An Overview Of GDP and Its Subparts

The above chart shows the percentage change in GDP and the contributions made by its various sub-parts.   The data is very revealing, while the expansion of the early 1950s was caused by a combination of government spending (from the Korean War) and pent-up consumer demand, this expansion is starting off with a big increase from PCEs and investment. We see PCEs increase strongly starting in the 2Q and continuing through the end of the year.  Investment contributions slightly to the 2Q, but really kicks into gear in the third and fourth quarters.  Net exports are an after-thought.  And government spending is actually subtracting from overall growth.

1953: GDP and Contributions to Growth

According to the NBER, the early 1950s expansion lasted from October 1949 to July 1953.  We can clearly see the contraction in the last two quarters in this chart:

We see the economy growing strongly in the first quarter, hitting a 7.7% growth rate.  Consumers are adding a fair amount to the overall growth, but the real contributor is government spending, which accounts for 43% of overall growth.  We see the same type of scenario play out in the second quarter, but government spending now accounts for 70% of all economic growth.  The third fourth quarter have contractions, where the big contributor to the contraction is the drop in investment, with consumer spending and government spending also contributing to the slowdown.

Also note the severity of the contraction, especially in the fourth quarter, where we see the economy contract by 6.2%.  That's a very large drop, and one we're not use to seeing.

1952: A Look At GDP and Its Subparts

This post is part of the Bonddad Economic History Project. 

Above is a graph of the percentage change in GDP and the contributions of various subparts.   The data tells us the following:

1.) There were two quarters of very good growth -- the first and fourth quarter.  The second quarter the economy was very close to 0% while the second quarter's growth was fair.

2.) PCEs provided a lot of firepower in the second and fourth quarter, while they added some in the third.

3.) Gross private investment was very strong in the third and fourth quarter.  It was a primary reason for the drag on growth in the second quarter.

4.) Net exports subtracted from growth in each quarter of the year.

5.) Government spending (from the Korean War) was the primary driver of growth in the first and second quarter.  It contributed in the third and added remarkably little in the fourth.

1951: GDP

Moving forward from 1950 and into 1951, we'll see the government spending -- in the form of war spending for the Korean War -- can indeed create economic growth.  In fact, it can be the primary driver for overall economic growth.

The above chart is of total GDP growth, along with the contributions of each sector of the economy to growth.  Notice that for each quarter of 1951, government spending  (the blue line) is very high.  In fact, the only other column as high are PCEs in the first quarter.  This chart shows that government spending can indeed drive economic growth.

1951 saw three quarters of very strong growth, with a very large slowdown in the fourth quarter.  Consumer spending was strong in the first quarter, contracted in the second and then returned to more normal rates of growth in the third and fourth quarter.  Investment was a remarkably huge drag for all but the second quarter.  Exports contributed some to growth, but the real story is the huge input of government spending, which basically drove growth for the entire year.

We'll start to look in detail at the various sub-components of growth over the coming week or so.

1950: GDP and Contributions to Growth

1950 was a year of incredibly strong growth.  We see percent changes from the preceding quarter of 17.2%, 12.7%, 16.6% and 7.2%.  For the entire year, we see investment and PCEs alternating as the primary driver of growth.  The incredibly strong increase in PCE's in the third quarter was caused by mass buying in anticipation of shortages because of the Korean War.

Delving deeper into the gross private domestic investment numbers, we see that inventory stockpiling was one of the primary drivers.  Interestingly, this reminds of this latest expansion when inventory rebuilds were part of the growth story, which was vehemently denied as being real economic growth by many commentators.  Also note there was a pick-up in fixed investment in the second and third quarter.

PCes were growing strongly in the first two quarters, but really accelerated in the third quarter, as consumers stocked up on durable goods -- again, in anticipation of coming shortages.  PCEs contracted strongly in the fourth quarter.  It makes sense to look at the strong third quarter numbers as pulling fourth quarter numbers forward.

Helping spur the PCE binge was an increase in consumer credit, which had been increasing for the preceding two years.  From the 1951 Economic Report to the President:

1950s GDP

The above chart is total GDP adjusted for 2005 dollars.  One of the problems with using chained numbers far away from the data (such as using 2005 dollars for 1950s figures) is you can get somewhat distorted data.  But it would be too severe -- plus, it's all we've got to work with.

First, note there were two recessions -- one from mid-1953- mid 1954 and a second from mid-1957- mid-1958.  Two, evenly spaced recessions over a decade is certainly different from our current experience.

Eyeballing the chart, total, inflation adjusted GDP increased from a little over $1.9 trillion to a little under $2.8 trillion -- or an increase of about 47%.  That is very impressive.   But, remember, the US was a smaller economy back then.  There was a tremendous amount of  pent-up demand and we were the only game in town -- Japan and Europe were still recovering from WWII, so we produced most of what we consumed by default and provided most of the goods to the rest of the world.

The above chart is the compounded annual rate of change of GDP.  Notice the very strong rates of growth in the early parts of the decade.  Remember the Korean War lasted from 25 June 1950 – 27 July 1953, so the 1951 figures include the country getting its war facilities up and running.  This explains the very strong growth rates in the early part of the decade.  However, there were two other periods -- the first clustered around 1955 and the second around 1959 - when the compounded annual rate of change was over 5%.

Looking at the first half of the decade, we see very strong growth rates 5%+ fort eh first 7 quarters. followed by four quarters of slower growth from 4Q51-3Q52.  There is another burst of three quarters of strong growth and then a recession from July 1953-May 1954.  However, the economy bounced from that lull in late 1954.

The economy grow strongly in the mid-50s, but slowed down in 1956-1957.  Notice there were three quarters of shallow contraction in 1956 and 1957.  In August 1957, the second recession of the 1950s started which lasted until April 1958.  This was followed by four quarters of incredibly strong growth.

What stands out here is that the economy vacillated from strong growth to recession fairly quickly.  Also note there were two quarters of extreme contraction -- the first quarter of 1953 and the first quarter of 1958.

The Oil choke collar in one easy graph

- by New Deal democrat

Oil analyst Steven Kopits, along with Prof. James Hamilton, are the two leading experts on how Oil shocks result in recessions. I have been referring to Mr. Kopits' metric every week in my "Weekly Indicators" summations. Kopits says that every time Oil prices rise to a level of 4% or more of GDP, a recession has followed.

Occasionally even the most popular economic bloggers, including top flight professors, express mystification at why the economy doesn't seem to be able to generate a self-sustaining liftoff. In response thereto, I give you the following graph, in which Oil prices as a percent of GDP are shown in blue (inverted, left scale), and quarterly GDP changes in red (right scale):



A little explanation is in order. The left scale is set to show the divergence in price from Kopits' inflection point of 4% of GDP. Thus the left scale result, n, equals 4 minus Oil price/GDP. If Oil price =5% of GDP, then N = 4-5= -1. Contrarily, if Oil price = 3% of GDP, then N = 4-3 = +1. Also note that since the graph had to be done quarterly, it does not reflect the decline in Oil prices since June 30.

As you can see, since the price of Oil approached the inflection point in 2005, it has predicted GDP changes very well. And it does not bode well for revisions to Q2 2011 GDP or the third quarter either.

Just to put this in longer perspective for you, here is the a bonus graph - the same relationship expanded to the last 50 years.



The only good thing here is that the public can become habituated to a certain high level of energy prices, and adjust their spending accordingly (this is an insight from Prof. Hamilton). Since we just had $4 gas two years ago, the expected impact on consumer spending isn't as great as if we had never seen this spring's $3.90 gas before.

Overnight Oil went as low as $75.71, which is its lowest price since September 2009, nearly 2 years ago. Proving once again that the remedy for high prices is, high prices (but it's painful).

Oil Prices and the Recovery 2

- by New Deal democrat

Last week I said that I was re-evaluating my overall view of where the economy was heading for the first time in over a year. Having put some further thoughts into the matter, and having exchanged several fruitful emails with Professor James Hamilton of Econbrowser and Bill McBride a/k/a Calculated Risk, I do feel that I have a better grasp of the situation.

I do believe the economy is at something of a crossroads. In terms of reading the tea leaves, we may well have the crucial information that will determine its direction within the next several weeks.

In general, the economy is being buffetted by at least 5 more or less coincidental events: the crisis in the Euro, the ending of the home buying credit, the Oil cataclysm unfolding in the Gulf of Mexico, the withdrawal of stimulus from the states and from the long term unemployed, and the aftereffects of the run-up in the price of Oil in the last 18 months from $37 to $88 a barrel.

I've addressed the issue of the crisis in the Euro already, and my thoughts there haven't changed. Today I want to take a further look at the effects of the price of Oil on the recovery.

It has been noted by Oil analyst Steve Kopits, as shown in the graph below, that when the price of Oil causes consumption expenditures to exceed 4% of GDP, a recession has always followed:



That didn't happen now, but we came within a whisker for a few weeks in April. So I wondered if a similar situation -- of Oil approaching but not crossing 4% of GDP -- had occurred in the past. The answer is staring us in the face in the above graph: it did, and it wasn't long ago, either -- a very similar thing happened in 2006.

First off, here is a long term graph of GDP (red) and the inflation-adjusted price of Oil (blue), normalized so that the two lines cross at the 4% mark (which happened exactly at the height of the oil shock in 1990 when Saddam Hussein invaded Kuwait (essentially this shows the same information as the graph above, but in slightly different form, and updated through April 2010):



You can see the two Oil price shocks in the 1970s, and the similar shock in 2007-08. Here is a close-up of the same graph, for the last 5 years:



You can see that the price of Oil came quite close to 4% of GDP in mid-2006 before suddenly declining through November -- a very similar value, and a very similar move to what is happening now (note that since we don't yet have the CPI for May, the Oil price graph does not reflect the nearly $20 decline in the price of Oil last month.

In addition to the price of Oil, growth in "real" M1 and M2 were similar to what they are now:

The difference being that in 2006, real M1 was negative and real M2 was barely positive. This year real M2 is negative, and real M1 is positive but decliningly so since February.

Professor Hamilton has generally indicated that the effects of changes in the price of Oil show up first, after just a few (3 or 4) months, in auto purchases, and PCE's in about 6 months. These in turn have the maximum effect on GDP about 6 months later, or 12 months after the change takes place.

In that regard, here is a graph of the price of Oil (blue) and absolute real GDP (red) for the last 5 years. Note that in 2006 as the price of Oil approached the 4% of GDP mark, real GDP stalled for one quarter, literally growing at almost an exact 0% pace, before accelerating again as Oil prices fell going towards the end of the year:

Although I haven't reproduced the graph here, employment growth also nearly stalled, with several months of about 50,000 in gains just as the price of Oil hit its peak.

In other words, all else being equal, we should expect GDP to nearly stall either this quarter or next quarter in response to Oil prices being in the $80-$90 range in March and April. Should the decline in prices last for at least several more months, all else being equal we should see increase auto sales and a re-acceleration of GDP.

Of course, not everything else is equal, for the reasons stated at the outset of this post. In a day or two, I'll explain what data will be most important to me in the next couple of weeks that may tell us in which direction the economy will likely proceed.

GDP Up 3.5% Part II

Let's look at the GDP report from a different angle -- the percentage increase and what each component of GDP added to GDP growth.

First, GDP increased 3.5%.

Durable good sales added 1.01 of the 3.5% or 29% of the total increase. That number is the result of C4C. That number is also highly unusual -- meaning it is way out of the ordinary. The highest that number had been since the 4Q05 was .46 -- and that number was also out of the ordinary. Suffice it to saw we're not going to get a goose like that from this number again.

Non-durable goods added .31 and services added .57. So combined these two other areas of growth were responsible for .88 of GDP growth, or 25%. This is why the broad based increase in PCEs (mentioned below) is so important. While car sales were a reason for the increase, they weren't the only reason.

Gross private domestic investment added 1.22 to the 3.5. The big movers there were positive contributions from the change in private inventories and increases in residential investment.

While exports did increase, imports also increased meaning we're back to imports subtracting from growth.

That leaves government spending which added .48 of to the 3.5.

While C4C was a boost, it wasn't the only are that helped. There were other reasons for the increase.

More on GDP

From CNBC:

Consumer spending, which accounts for over over two-thirds of U.S. economic activity, fell at a 1.2 percent rate in the second quarter after rising 0.6 percent in the previous quarter.

That sliced 0.88 percentage points from second quarter GDP, the department said.

.....

In contrast to the weak consumer reading, business investment improved significantly in the second quarter. The advance report showed business investment decreased at an 8.9 percent rate in the second quarter after diving 39.2 percent in the previous quarter.

.....

Investment in nonresidential structures fell at an 8.9 percent rate compared to a 43.6 percent drop in the first quarter.

Residential investment, which is at the core of the longest recession since the Great Depression, dropped at a 29.3 percent rate in the April-June period after plummeting by 38.2 percent in the first quarter.

"This report has written all over it the continued divergence between consumers and businesses," said Ashraf Laidi, chief market strategist at CMC Markets in London.

The drop in consumer spending raises concerns. It indicates the recent decline in consumer sentiment is seeping through to spending activity.

However, the drop in the decline in investment is good news. It indicates that business -- while cautious -- is feeling a bit better.

GDP and the Unemployment Rate

Below are four graphs which correlate the year over year percentage change in GDP and the unemployment rate. Notice the year over year percentage change in GPP bottoms before the unemployment rate tops. That means we need to see GDP declines stop before we can even think of unemployment's rising stopping.

Click on all images for a larger image

The Latest Expansion's GDP, Investment

Today I'm going to continue on the GDP theme by looking at investment.

Click on all pictures for a larger image.

All figures are in 2000 chained dollars.

Total gross investment increased until the beginning of 2006 when it started to decline.



Gross investment as a percentage of GDP also increased to a bit above 17%% in 2006 and has fallen since. Now it stands at 11.86%.


Non-Residential Structures remained relatively constant until about mid-way through the expansion. Then they took off in a big way. They have only recently started to fall.


Non-residential structures increased from about 2.5% of GDP to 3% of GDP and has only recently started to fall.


Residential investment increased until the end of 2005/beginning of 2006. It has since dropped hard and fast.


Residential investments as a percent of GDP followed the same track. Now it stands at 2.58%.

In late cycle increase in non-residential investment probably prevented a housing crash back in 2006. By that time the housing bubble was nearing its absolute peak. But the increase in commercial real estate investment pulled residential construction workers into the commercial market.

The Latest Expansion's GDP, PCE's Part II

Let's continue a look at the latest expansion's GDP with an in-depth look at PCEs.


Consumers continued to devote a larger percentage of their spending to durable goods for most of the expansion. Notice this percentage topped out in the last three quarters of 2007 before falling sharply for the next four quarters.
Non-durables as a percentage of income also increased, but they topped at an earlier time -- the first quarter of 2007. Then they continued to drop as a percentage of PCEs until their spike last quarter.


Oddly enough, services decreased as a percentage of PCEs until the third quarter of 2007 when they started moving higher.

The Latest Expansion's GDP, PCE's Part I

I'm going to spend today looking at what happened during the last expansion from a GDP perspective. Simply put, I want to see what the data days about the latest expansion. So, let's start with personal consumption expenditures.

Click on all images for a larger image.

All data is based on 2000 chained dollar numbers.

Personal consumption expenditures (PCEs) rose consistently until the fourth quarter of 2007 when the recession began. Then from 3Q07 to 2Q08 they still increased but at a far lower rate. The last two quarters of last year they dropped hard. This was a primary reason for the contraction in GDP because PCEs comprise 70% of GDP. Last quarter we saw a bump but we'll have to wait and see if it continues.
Durable goods was a big reason for the drop. Notice that these topped out in the fourth quarter of 2007, moved down a bit for the next two quarters and then fell hard in the third and fourht quarter of last year.

Like durable goods, non-durable goods purchases topped out in the fourht quarter of 2007. They rose a bit for the next two quarters and then fell in the later half of 2008.

Services have yet to contract.