Friday, August 2, 2013

The Elements of GDP

The above chart shows GDP growth rates (solid blue) and its components(data from the Federal Reserve of St. Louis):

  • Consumption - PCE in red; about 70% of GDP
  • Government - WO68RCQ027SBEA in purple, about 22% of GDP
  • Investment - Business (PNFI - Private Net Financial Investment) in green; Private residential (PRFI - Private Residential Fixed Investment) in orange; combined Investment is about 13-15% of GDP
  • Net Exports (Exports - Imports) - not shown; generally 5-7% of the economy
Here's the macroeconomic equation:

          GDP = C + G + I + (X - M)

Since Imports invariably exceed Exports, Net Exports (X - M) is regularly a 5 - 7% drag on GDP. They are not shown above, because FRED did not have a comparable, year-over-year, quarterly comparison(not inflation adjusted).

Just a few things to notice from this chart:
  •  Consumption growth rate hugs the GDP line, and fairly much defines it - understandable, since this is about 70% of the total. Modest growth has been pretty steady since early 2010
  • Housing investment turned south in mid-2006, well before the September 2008 Lehman moment.
  • Business investment cratered in late 2009, recovered nicely, hitting its peak at the end of 2011, and is trending down.
  • It looks like the housing upturn has legs.
  • The laggard is Government. Essentially no growth since the middle of 2010
  • Going forward, if Housing continues strong, helping to offset the somewhat weak Business Investment, we should continue to see modest GDP growth. If the Government were to invest in infrastructure, or similar job-building programs, growth would accelerate.
A few other observations:

  1. It's very hard to look at this chart and argue that the big increase in spending after the Lehman crash did not positively affect the economy. Government spending jumped up in mid-2008 and stayed high and quickly growing into the second quarter of 2009 - precisely when Consumer Spending, Business and Private Residential Investment turned up. The stimulus worked.
  2. Government spending moderated in early 2009, with its growth rate cut to near zero in early 2011, where it has remained. The GOP incessant arguments about runaway spending is crap.
  3. Notice that Business Investment grew strongly in the Summer and Fall of 2011, a time of enormous political uncertainty over the debt ceiling. The GOP argument that regulation and tax uncertainty causes business to sit on their money is also crap.
  4. And can you detect any negative change in consumer spending and residential investment from the 2013 tax increases, including the increase of 2% in the payroll tax? This last item should be a fiscal drag, holding private consumption back, but it didn't do that this time around. The perpetual argument that tax increases for the top 2% will quickly affect overall spending is hogwash. PCE has been quite steady. Business investment has trended down, but this began in early 2012, and it has stabilized since the January 2013 increases.
And finally, the most obvious thing from this chart for me is that the Government is not spending nearly enough to move us into a strong growth position. Pete Peterson, among others, have made us terrified of deficits and government debt. They are wrong. Almost completely. But they have won the day on the political playing field, because even the President and the Democrats have taken a partial austerity stance. More on this to come.

Meanwhile, we're doing OK. Obamacare will kick Government spending up a notch in 2014. I'm hopeful that the US energy transformation via fracking will underpin new business investment. Immigration would be a strong positive, if it passed - but I'm afraid it won't, at least not before the 2014 mid-terms. We need more Government investment, in infrastructure, education, and manufacturing. Again not likely, unless Dems retake the House.

But we're doing OK on a GDP basis, not so well on an income equality basis; but to address this, Dems need to retake the House.

No comments:

Post a Comment