Thursday, October 29, 2009

Q3 GDP +3.5% breakdown

Figure 1. Source:

Hallelujah? The consumer has come back with a bang? It kind of seems that way. However, all components of GDP are up. Even the "decline" in net exports can be read as a good sign since it's driven by the fact that imports have increased faster than exports which have increased for the first time in a year. However, proportionately inventory and residential investment--yeah, thats right, housing went positive--did a lot of heavy lifting.

Consumption, which is almost 71% of GDP contributed roughly proportionally to the increase in GDP. Investment as a whole which has fallen to just about 11% of GDP gave us almost 35% of third quarter growth.

Last quarter government spending played a big role in softening the recession. it seems to have contributed relatively little in Q3.

A closer look at the different components of GDP

Figure 2. Source:

I wish there was more to report here. The one thing I'm interested in is what cash-for-clunkers did. According to the BEA press release auto sales added 1.66 of the 3.5% (about 40%). Of the $44 billion increase in durable goods consumption $40 billion of it was auto (and auto parts). However, it should be noted that imported autos, engines and parts amounted to $43 billion dollars. I'm not entirely sure what that says about the stimulus effects of cash-for-clunkers. Did it stimulate the US auto industry or that Japanese auto industry? The only thing that can be said for certain is that almost the entire increase in sales of durable goods was from the sale of autos.

Figure 3. Source:

Obviously the big news in investment is the increase in residential housing construction. Residential investment has been falling since 2006Q1. How it is possible that it is growing is beyond me, but I suppose it is good if not weak news. A regional breakdown of where construction activity is taking place would be interesting.

The other thing worth talking about is the "change in inventories". It should be pointed out what what is being shown in the graph is "the change in the change in inventories". They are still allowing their inventories to sell off but at a slower rate. It is important to note that in 2009Q2 inventories were $176 billion less than they were in 2009Q1. In 2009Q3 inventories were $147 less than in 2009Q3. Essentially, the inventory liquidation is slowing down a little bit which implies an increase in production.

Figure 4 Source:

I'm putting up this graph to make it clear what exactly it is that is measured by GDP. GDP measures final goods and services bought and sold by consumers, firms and the government. What we want from GDP is an estimate of the production (and income) of the country over the quarter (or year). GDP accounting is also referred to as NIPA (National Income and Product Accounting). There are two "leaks" out of this system, imports and exports that need to be accounted for if we are to get a proper estimate of production and income. Since no one in the US buys exports we need to adjust for the extra income (and production) created by exports when they are sold abroad. We also need to account for imports, which are final goods and services that American consumers, firms and governments buy but are not produced in this country and do not produce income for Americans.

I just want to point out this is neither "good" nor "bad" from a NIPA perspective. It is just an adjustment that needs to be made for an accurate calculation of GDP. That calculation is already done for the overall GDP estimates in Figure 1, but the individual categories are not adjusted for what comes from imports.

Anyway, Exports - Imports = Net Exports. There are a couple of things worth highlighting. First, in 2008iv andd 2009i on balance it would look like we had an increase in net exports. It is important to notice that exports to the rest of the world were falling from previous periods, its just that what we imported from abroad fell by a much larger amount. While for 2009iii we had negative net exports but we had positive exports for the first time in a year. Those exports were income for Americans. However, we also increased our imports for the first time in a year.

That $117 billion in imports has to be taken out of the estimates of consumption, investment and government spending. As far as I can tell, we increased petroleum imports by $15 billion. As well, we imported about $18 billion in capital goods and as I mentioned above we also imported about $43 billion dollars in automobile supplies. The rest of the increase in imports is spread out over other categories of goods and services.

Figure 5. Source:

The interesting thing about the change in government spending is that it is half of what it was in the second quarter. That seems to suggest that the stimulus attempt has waned considerably. Although Federal spending is growing at a constant rate state and local spending increased by a tiny $2.6 billion dollars. Given the financial problems facing many state and my hunch that most of the stimulus spending should be showing up as state spending after the federal government transfers them the money it is almost kind of shocking to see the growth of state and local spending so low.

It should be noted though that the cash-for-clunkers program counts as stimulus spending though it wouldn't really show up as government spending.

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