Q3 GDP +3.5% breakdown

Figure 1. Source: bea.gov

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: bea.gov

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: bea.gov

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: bea.gov

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: bea.gov

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.

Eichengreen and O'rourke: A Tale of Two Depression.

I Left out the country by country graphs. Click on the title below for the full post.

A Tale of Two Depressions
Barry Eichengreen Kevin H. O’Rourke
4 June 2009

This is an update of the authors' 6 April 2009 column comparing today's global crisis to the Great Depression. World industrial production, trade, and stock markets are diving faster now than during 1929-30. Fortunately, the policy response to date is much better. The update shows that trade and stock markets have shown some improvement without reversing the overall conclusion -- today's crisis is at least as bad as the Great Depression.

Editor’s note: The 6 April 2009 Vox column by Barry Eichengreen and Kevin O’Rourke shattered all Vox readership records, with 30,000 views in less than 48 hours and over 100,000 within the week. The authors will update the charts as new data emerges; this updated column is the first, presenting monthly data up to April 2009. (The updates and much more will eventually appear in a paper the authors are writing a paper for Economic Policy.)

New findings:

* World industrial production continues to track closely the 1930s fall, with no clear signs of ‘green shoots’.
* World stock markets have rebounded a bit since March, and world trade has stabilised, but these are still following paths far below the ones they followed in the Great Depression.
* There are new charts for individual nations’ industrial output. The big-4 EU nations divide north-south; today’s German and British industrial output are closely tracking their rate of fall in the 1930s, while Italy and France are doing much worse.
* The North Americans (US & Canada) continue to see their industrial output fall approximately in line with what happened in the 1929 crisis, with no clear signs of a turn around.
* Japan’s industrial output in February was 25 percentage points lower than at the equivalent stage in the Great Depression. There was however a sharp rebound in March.

The facts for Chile, Belgium, Czechoslovakia, Poland and Sweden are displayed below; note the rebound in Eastern Europe.

Updated Figure 1. World Industrial Output, Now vs Then (updated)


Updated Figure 2. World Stock Markets, Now vs Then (updated)


Updated Figure 3. The Volume of World Trade, Now vs Then (updated)


Updated Figure 4. Central Bank Discount Rates, Now vs Then (7 country average)



Start of original column (published 6 April 2009)

The parallels between the Great Depression of the 1930s and our current Great Recession have been widely remarked upon. Paul Krugman has compared the fall in US industrial production from its mid-1929 and late-2007 peaks, showing that it has been milder this time. On this basis he refers to the current situation, with characteristic black humour, as only “half a Great Depression.” The “Four Bad Bears” graph comparing the Dow in 1929-30 and S&P 500 in 2008-9 has similarly had wide circulation (Short 2009). It shows the US stock market since late 2007 falling just about as fast as in 1929-30.
Comparing the Great Depression to now for the world, not just the US

This and most other commentary contrasting the two episodes compares America then and now. This, however, is a misleading picture. The Great Depression was a global phenomenon. Even if it originated, in some sense, in the US, it was transmitted internationally by trade flows, capital flows and commodity prices. That said, different countries were affected differently. The US is not representative of their experiences.

Our Great Recession is every bit as global, earlier hopes for decoupling in Asia and Europe notwithstanding. Increasingly there is awareness that events have taken an even uglier turn outside the US, with even larger falls in manufacturing production, exports and equity prices.

In fact, when we look globally, as in Figure 1, the decline in industrial production in the last nine months has been at least as severe as in the nine months following the 1929 peak. (All graphs in this column track behaviour after the peaks in world industrial production, which occurred in June 1929 and April 2008.) Here, then, is a first illustration of how the global picture provides a very different and, indeed, more disturbing perspective than the US case considered by Krugman, which as noted earlier shows a smaller decline in manufacturing production now than then.

Figure 1. World Industrial Output, Now vs Then


Source: Eichengreen and O’Rourke (2009) and IMF.

Similarly, while the fall in US stock market has tracked 1929, global stock markets are falling even faster now than in the Great Depression (Figure 2). Again this is contrary to the impression left by those who, basing their comparison on the US market alone, suggest that the current crash is no more serious than that of 1929-30.

Figure 2. World Stock Markets, Now vs Then
http://www.voxeu.org/files/image/depression_fig2.gif
Source: Global Financial Database.

Another area where we are “surpassing” our forbearers is in destroying trade. World trade is falling much faster now than in 1929-30 (Figure 3). This is highly alarming given the prominence attached in the historical literature to trade destruction as a factor compounding the Great Depression.

Figure 3. The Volume of World Trade, Now vs Then

Sources: League of Nations Monthly Bulletin of Statistics, http://www.cpb.nl/eng/research/sector2/data/trademonitor.html
It’s a Depression alright

To sum up, globally we are tracking or doing even worse than the Great Depression, whether the metric is industrial production, exports or equity valuations. Focusing on the US causes one to minimise this alarming fact. The “Great Recession” label may turn out to be too optimistic. This is a Depression-sized event.

That said, we are only one year into the current crisis, whereas after 1929 the world economy continued to shrink for three successive years. What matters now is that policy makers arrest the decline. We therefore turn to the policy response.
Policy responses: Then and now

Figure 4 shows a GDP-weighted average of central bank discount rates for 7 countries. As can be seen, in both crises there was a lag of five or six months before discount rates responded to the passing of the peak, although in the present crisis rates have been cut more rapidly and from a lower level. There is more at work here than simply the difference between George Harrison and Ben Bernanke. The central bank response has differed globally.

Figure 4. Central Bank Discount Rates, Now vs Then (7 country average)

Source: Bernanke and Mihov (2000); Bank of England, ECB, Bank of Japan, St. Louis Fed, National Bank of Poland, Sveriges Riksbank.

Figure 5 shows money supply for a GDP-weighted average of 19 countries accounting for more than half of world GDP in 2004. Clearly, monetary expansion was more rapid in the run-up to the 2008 crisis than during 1925-29, which is a reminder that the stage-setting events were not the same in the two cases. Moreover, the global money supply continued to grow rapidly in 2008, unlike in 1929 when it levelled off and then underwent a catastrophic decline.

Figure 5. Money Supplies, 19 Countries, Now vs Then

Source: Bordo et al. (2001), IMF International Financial Statistics, OECD Monthly Economic Indicators.

Figure 6 is the analogous picture for fiscal policy, in this case for 24 countries. The interwar measure is the fiscal surplus as a percentage of GDP. The current data include the IMF’s World Economic Outlook Update forecasts for 2009 and 2010. As can be seen, fiscal deficits expanded after 1929 but only modestly. Clearly, willingness to run deficits today is considerably greater.

Figure 6. Government Budget Surpluses, Now vs Then

Source: Bordo et al. (2001), IMF World Economic Outlook, January 2009.
Conclusion

To summarise: the world is currently undergoing an economic shock every bit as big as the Great Depression shock of 1929-30. Looking just at the US leads one to overlook how alarming the current situation is even in comparison with 1929-30.

The good news, of course, is that the policy response is very different. The question now is whether that policy response will work. For the answer, stay tuned for our next column.
References

Eichengreen, B. and K.H. O’Rourke. 2009. “A Tale of Two Depressions.” In progress.

Bernanke, B.S. 2000. Bernanke, B.S. and I. Mihov. 2000. “Deflation and Monetary Contraction in the Great Depression: An Analysis by Simple Ratios.” In B.S. Bernanke, Essays on the Great Depression. Princeton: Princeton University Press.

Bordo, M.D., B. Eichengreen, D. Klingebiel and M.S. Martinez-Peria. 2001. “Is the Crisis Problem Growing More Severe?” Economic Policy32: 51-82.

Paul Krugman, “The Great Recession versus the Great Depression,” Conscience of a Liberal (20 March 2009).

Doug Short, “Four Bad Bears,” DShort: Financial Lifecycle Planning” (20 March 2009).