Borrowing future growth

By Fester:

Today's employment and unemployment numbers were ugly.  The unemployment rate went to 6.1%, another 84,000 jobs were cut in the initial August estimates after the July estimate was increased to a job loss of 100,000 jobs, and wage gains are significantly below inflation.  The US economy has lost jobs year over year.  More Americans were employed in August 2007 than were employed in August 2008.  Labor force participation is down as there are fewer jobs and a larger workforce.  This is a weak job market, so people are getting paid less. 

Yet the economic triumphalists or deliberate ignorants can point to the 2nd quarter GDP data that shows a pretty solid quarter of growth.  Some credit the short term rebate check stimulus.  but there is another reason that sounds very plausible for this good number despite all of the labor, income, and credit market problems. 

Dave Altig at Macroblog and the Atlanta Fed provides a good, relatively non-geeky explanation behind why the Q2 GDP growth figure (3.3%) came out so high.  It is mainly a logical statistical/analytical quirk:

If both incomes and oil consumption are relatively fixed in the short-run, what would we expect to happen? The answer is more expenditure on imported oil and less spending on everything else. As the demand for domestically produced goods and services falls, so would their prices. (Or more generally, they would rise at a slower than normal pace.) Since domestically produced goods and services by definition constitute GDP, GDP-deflator inflation will be low, while the consumer price index (which would include nonexported GDP plus imports) could well be quite high.

This basically means that the 2nd quarter 'borrowed' future growth in the headline GDP number as this was when oil started to really skyrocket.  It peaked during the start of the 3rd quarter, and now it is dropping as US and global growth is slowing dramatically.  So we'll see a high GDP deflater in the 3rd and 4th quarters relative to the CPI as cheaper oil means more pricing power for domestic goods. 

Comments

[Bruce Sanders]

You're completely missing the boat here. The economy shrank in the second quarter. Possibly by as much as 2.9 % annualized. The "official" numbers have been gamed by using ludicrously low inflation rates in the calculation of GDP. Underadjusting for inflation makes the GDP look bigger than it really is. It is important to understand this. Real GDP has shrunk for 3 straight quarters. We are in a recession. You don't need to explain the growth numbers away. They are false. For a complete discussion see Barry Ritholtz's article: http://bigpicture.typepad.com/comments/2008/08/gdp-gross-decep.html