As I understand it the quarterly GDP reported is quarterly data that is then annualized, and is reported as a change, quarter over quarter, annualized. So, if the 2Q19 GDP is reported as 2.9%, that suggests the annual GDP will be 2.9% greater than the 2018 GDP.
I could be wrong, but that's how I understand it.
I posted all that to note this post from August 11, 2012: "it never quits."
With the economy seemingly doing so well, some folks remain confused why the GDP is not higher or rising more quickly. By the way, international currency manipulation can have a huge effect on reported GDP and that's why some folks prefer purchasing power parity when comparing GDP among different countries. But I digress.
Although consumer spending (CS) accounts for two-thirds of the US GDP, the other three components in the equation are not trivial (although I might argue that point):
- investment by businesses
- government spending
- net exports
- when I went back and looked at the above "it never quits" link it dawned on me that energy infrastructure investment in US shale peaked by the end of 2014: pipelines; CBR; greenfield development; etc.
- The Trump tax incentives for business investment must have peaked by the end of 2018, after the tax reform bill was signed on December 22, 2017, the largest overhaul in tax law in 30 years.
- I've long lost the bubble on government spending but President Trump has been trying to slow such spending down, working against his own goal to increase GDP.
- dollar strength, 43-year history; compare the strength of the US dollar during the Trump administration with the strength of the dollar during the previous administration; huge difference
In other words, as "I" see it, it is said that US consumer spending accounts for two-thirds of US GDP. In reality, if one dismisses the I, GS, and EX as irrelevant in the big scheme of things we get back to consumer spending as the only relevant driver of GDP calculations.
I know folks will challenge me calling I, GS, and EX as irrelevant but the problem with these three data point they are more closely connected to politics: one party likes a weak dollar; the other party likes a strong dollar; governments can manipulate currency; and, like a strong dollar, one party likes big government spending; the other party likes less government spending (whether they adhere to their beliefs is a separate issue).
[Ironically -- if that's the right word -- going to war -- all else being equal -- would greatly improve a country's GDP: government spending would increase; and business investment to support the war would increase.]
The US equity market has already had an incredible year, If we have a Santa Claus rally, 50% of Americans (or more) will feel "richer" (even if they are not) and further drive consumer spending).
Going forward, 4Q19 and 1Q20:
- CS: will not contract; consumer spending will increase if anything; especially if there is a Santa Claus rally on top of an already incredible year for investors
- GS: no change
- BI: no change; probably can't contract any more than it already has
- EX: probably a wash; a strong dollar will negatively impact the equation, but increasing energy exports will offset that to some degree
as you know, i cover the GDP report every month, probably as thoroughly as anyone not getting paid to do it...what almost everyone misses, including most economists, is that "real GDP", or the numbers quoted each month, is a measure of things, not money...the BEA gets that measure by deflating spending in each catagory with it's corresponding price index...for example, if consumers consume 10 apples at $1 each in 2018, and consume 10 apples at $1.10 each in 2019, consumer spending will have gone up 10%....however, the CPI index for apples, which shows their 10% price rise, will be applied to that spending, and GDP, which measures the number of apples produced by the economy, will be unchanged year over year...
ReplyDeleteThank you so much. I knew nothing about GDP a year ago (just as I knew nothing about natural gas ten years ago and still know little about either). But the more I learn about GDP the more I realize there are a lot of issues/problems with regard to GDP.
DeleteRecently a reader sent me a video of a reporter correlating "quality of life" with GDP, and then one remembers that going to war will, at least temporarily, increase a country's GDP (government spending, business investment to support the war).
So, yes, you provide another great example. Selling the same number of apples year-over-year and saying that by increasing GDP things have gotten better.
By the way, that's why I also have problems when economists tell me consumer spending has gone up (which they consider "good") when the price of gasoline has gone up ("bad").
And, yes, without question, following your GDP report every month has been very, very interesting ... though at times, more than I could absorb. LOL.
if you every have questions about anything i wrote, don't hesitate to ask...i try to be as clear as i can about how GDP goes together, but it's a nerdy subject and sometimes i'll drift into the more esoteric elements in order to be accurate, when i don't imagine most readers need that much detail...
DeleteThank you, much appreciated.
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