Comment on U.S. GDP Revision

May 29, 2014

Here’s what I take away from the 1.1 percentage point downward revision in first-quarter real economic growth to -1.0% at an annualized rate.

Number one, although this is only the second negative quarter in the last nineteen quarters that comprise the current business upswing.  Looked at that way, it’s an infrequent but not unusual or alarming event.  The previous negative quarter three years earlier saw GDP contract 1.3% in 1Q11.  The U.S. economy grew just 1.6% annualized in the past six quarters, that is year and a half.  In the six quarters through 1Q11, by comparison, GDP expanded at a 2.3% annualized pace, so underlying momentum in the economy, never strong to begin with, has been ebbing.

Number two, only personal consumption, which augmented real GDP at an annualized rate by 2.09 percentage points (ppts), propelled the U.S. economy forward last quarter.  All other elements of aggregate demand exerted drags on growth, equal to 0.2 ppts from non-residential investment, 0.16 ppts from residential investment, 0.15 ppts from government expenditures, 0.83 ppts from exports, 0.12 ppts from imports, and 1.62 ppts from inventories.

Number three, the data show a continuing lack of evidence that President Obama is the spendthrift that is critics claim him to be.  Government spending fell by 1.5% in the year to 1Q14.  In the year before that, government expenditures had shrunk by 1.8%.  It also fell 1.7% in the year to 1Q12 and by 2.3% in the year to 1Q11.  That’s a marginal contraction of marginally over 7.0% during the past four years.  Fiscal policy has been tight.

And Number four, disinflation has been too extreme.  The core personal consumption expenditure price deflator went up 1.1% in the year to 1Q14, down from 1.5% in the year to 1Q13 and 2.0% in the year to 1Q12.  The Fed has been engaging in quantitative monetary easing off and on but mostly on since late 2008, some 5-1/2 years ago.  That span of time constitutes the economists’ proverbial “long run,” even allowing for the long lags between a change in monetary policy and its impact on the economy.  Nonetheless, inflation is still anemic, and one cannot say that such has definitively bottomed yet.  Likewise, nominal GDP has risen only at a 3.0% annualized rate during the past 18 months and at an average 3.8% pace over the nearly five-year length of the present economic upswing.  These highly measured rates of climb compare to a 5.6% average rise in nominal GDP during the 1990s.  Inflationary fear-mongers of a monetarist persuasion have been giving policymakers bad advice since the start of the 21st century.

Copyright 2014, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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