The Tutorial
The chart I like the best is the one that shows contributions to percent change in real GDP. First of all, it's inflation-adjusted. That takes care of one variable. Second, it's broken down into the units and terms we're used to. We normally think of GDP in terms of the annualized % growth rate. Saying the GDP grew 1.7% in Q2 means that the rate the economy was growing during Q2 would result in the economy being 1.7% larger after one year. It's kind of like talking about credit card interest rates or loans in terms of "APR." It's a standardized measure we're accustomed to interpreting.
The US GDP grew at a rate of 2% in Q3'11. This isn't 2% before inflation, it's 2% after inflation. If inflation was 3% (annualized rate), it means that the absolute GDP growth rate would have been 5%. Remember, too, that the GDP didn't grow 2% in Q3. It grew at an annualized rate of 2%. If that growth was spread out evenly over the year, that would mean that it grew about 0.5% during Q3.
GDP is calculated as the value of all goods and services produced in three sectors (consumers, business investment, and government) +/- net foreign trade. The reason why you have to add or subtract foreign trade is that otherwise, if we produced more, but sold more overseas, it would look like our economy hadn't grown, even though it had. Similarly, if we bought more outside the US, it would look like we had produced things which we didn't (someone else produced them and we bought them). Remember, GDP is a measure of production; even if parts of it are calculated my measuring consumption. It's not a measure of the amoung of wealth saved up in bank accounts or a measure of consumption. It's also only sort of a measure of how much we've really invested. The GDP is broken down into durable and non-durable components, but these breakdowns don't tell the whole story. We could build 100,000,000 tractors and the GDP would seem really good for one quarter, but the long-term quality of this investment strategy is questionable at best. The way this chart works, if you add up the contribution from consumption in Q3 (1.79), the contribution from investment (1.54), and then the contribution from government (0.68), then add a negative (2.01) (for foreign trade), you get the overall annualized rate of 2.0%.
Breaking the numbers down in this way helps one understand the numbers enough to make use of them. Let's say you work at a company that paints office buildings. These paint jobs are durable goods and services. They are things which would contribute to the 1.54 contribution from investment. Here is a chart that shows the breakdown of the US GDP by sector. This shows NOT how much each sector contributed to the growth in the GDP, but simply how big each sector is. Notice how the investment component is fairly small. Business investment makes up only perhaps 10-15% of the total GDP. This means that the 1.54 contribution is REALLY LARGE. Over 3/4 of the total net growth in GDP was attributable to the private investment sector (which is nearly all business) despite the fact that that sector is only about 1/10 of the overall economy.
So, if you're an office painter, you might think, "Wow, great. That means that my industry is booming! I might have lots of new customers!" A deeper look, however, dashes these hopes. Let's look at the breakdown of the Gross Private Domestic Investment component. Of the 1.54, 1.44 is just a change in inventories. Our painter now seems less optimistic. Only 0.10 of that 1.54 is made up of investment in "Structures" which are the things he paints. The painter might take some solace in seeing that inventories are up, though, and think, "Maybe stores will be trying to get rid of inventory and now is a good time to stock up on paint!" And indeed, that might be a good idea. He would need to look at a more detailed breakdown to see how much he could learn about the inventories for paint in particular (because, again, it might be that while inventories are up in general, they aren't up among paint manufacturers or vendors).
Technical note: In general, if you want to see if a contribution from one area is large relative to another, you must "normalize" them by a) dividing the contribution from a sector by the total GDP growth, and then b) comparing this to the percentage of the total GDP which this sector comprises. Where (a) yields a larger number than (b), you've identified a sector where growth was relatively fast.
My Analysis
I apply the above process to the GDP across all the different components, and I look for things that stand out. Here is the summary of what I see in the Q3 2011 numbers:
Imports: The imports number in Q2 was a HUGE drag on the economy. In Q3 it's not dragging the overall number down as much, but it's still significant. We're importing a ton of goods, and a lot less services. This is pretty important, because it means that if you're an a service industry, the relevant parts of the GDP might be "growing" faster for you than in general.
Personal consumption: This is, by far, the largest sector of the economy, and it posted its best number (by % contribution) of the last 11 quarters.
Exports: Exports grew during Q3'11. This is not intuitive, because net foreign trade contributed negatively to the overall GDP growth. But, exports grew. Imports just grew more quickly. This is really important because if you're generally a company that, say, helps exporters, your likely pool of customers grew. Just because there are more importers doesn't mean there are less exporters.
Sellers of "goods": If you work for a company that sells TV's at Best Buy, these numbers are so-so. You don't really care too much about imports and exports, because it doesn't really matter to you where the stuff at Best Buy comes from, you just want to know if retail sales are generally "strong" or "weak." Personal consumption (much of which is sales at retail), here, is a fairly strong contributor. However, much of this positivity comes from services, not goods. Non-durable goods make up about 16% of the overall GDP, and account for about 10% of the growth in GDP.
Government: State and local governments make up about 59% of the whole government sector in the country. This number has actually fallen, as local governments have laid people off and the federal government has spent massive amounts of money to stimulate the economy and run huge, huge deficits. As recently as 2008, local and state government accounted for 63% of all government spending. Many years ago, as much as 70% of government was state and local. The shift from state and local spending to federal spending is good and bad. From the standpoint of suppliers to the government, it means fewer, large, centralized contracts. It may also mean more jobs in Washington and less jobs in Columbus, Lansing, and Albany. Generally, when the economy is growing and yet the government sector is shrinking, that is a really good sign for businesses and long-term prospects. It means that manufacturing and trade activity are flourishing.
Connection to jobs: Many, many things influence the growth of jobs in the country. The GDP doesn't tell the whole story when it comes to jobs. But, it does provide a starting point. If the GDP is growing, economic activity is growing. Usually, this leads to jobs being created (sometimes with a lag). However, the population of the country is also changing. People immigrate and emigrate, they age and die. New people are born. It is overly simplistic, but if the country's population is growing 2% per year and the real GDP is growing 2% per year, one might expect the unemployment rate to stay constant (because there are just as many new jobs being created as there are new job seekers). This type of analysis is very crude, but it is consistent with what we're seeing today. If we just looked at consumption, investment, and government, we would see a GDP growth rate of 4.01%. That's roughly equivalent to the rate that we're "consuming" things. However, half of that consumption "growth" is being supplied by foreign producers. Thus, not very many jobs in the US are being created. It's tempting to think we should, therefore, stop imports. This is wrong and usually doesn't work, but it seems intuitive. Remember, though, that stopping imports isn't what matters. Increasing exports creates jobs. Ceasing imports doesn't create jobs, it just makes things more expensive. We should try to grow exports, consumption, and investment. Those are all drivers of jobs. We should grow government where it's efficient, but the overall size of government is probably already big enough. Government is generally less efficient than private industry, and it certainly lags behind private industry in two important categories: 1) making smart investments, and 2) creating productivity-enhancing technology.
Summary: In summary, the GDP growth numbers are mixed. The economy is growing, but it's not growing fast enough to create a lot of jobs. Some of that growth is government, which isn't as sustainable in the long run as other kinds of growth. No one sector, right now, is horribly under- or over-performing. An overall growth rate of about 3.5% is a much more healthy level. Hopefully we'll reach that kind of rate again in another quarter or two, but I'm not holding my breath. I think we may be in for several more quarters of lackluster 1.8-2.8% growth.
No comments:
Post a Comment