Today’s report on fourth quarter GDP came in slightly lower than expected at 3.1% annualized real growth versus average estimate of 3.5%. A sharp (10.3%) increase in business investments and a continued increase in private consumption and inventories contributed to the increase while government consumption and residential investments slowed and net exports deteriorated. The increase in the personal savings rate that occured despite a rapid increase in personal consumption was entirely a result of the temporary factor of Microsoft’s extra dividend of $30 billion (Roughly $25 billion went to U.S. households, the rest to state and local governments and non-Americans).Yet the fact is that the report is weaker than it looks as it underestimates the drag from the increase in the trade deficit. The trade gap in October-November were $116.3 billion or $174.5 billion at a quarterly rate versus $153 billion in the third quarter. A increase of $21.5 billion in a quarterly $3 trillion economy would imply a annualized drag of 2.9%:points, yet the GDP report only estimates the negative effect to 1.7 %:points.
This is partly due to the perverse logic in modern GDP accounting that nominal GDP increases should be deflated with the increase in export prices (as well as domestic sales prices) but not with the increase in import prices. That is with the increase in the prices of what Americans sell not with the increase in the prices of what Americans buy. But this does not make any sense because people don’t get richer if the prices of what they sell fall (quite to the contrary!) as this “logic” implies, but they do get wealthier if the prices of what they buy falls. Thus, nominal GDP increase should be deflated with the increase in the gross domestic purchases index which increased 2.7% as compared to the 2% increase in the GDP price index. This would mean a GDP increase of 2.4% rather than the 3.1% which were reported.
Moreover, this report assumes a sharp fall in the December trade gap since they have calculated the total deficit in the third quarter to $171.9 billion ($687.5 billion annualized). This would imply a December trade gap of $55.6 billion, not only lower than the record $60.3 billion in November but also lower than the October $56 billion. While it may be likely that the deficit will fall from the record level in November, it seems unlikely that it will fall that much, particularly since most countries who have already reported on the December trade balance have seen their surpluses increase implying a lower likelyhood of a fall in the U.S. trade deficit
So, unless the trade deficit falls below its October-November average and/or there is a upward revision of domestic demand, GDP will have to be downwardly revised further. Together with the adjustment for the worsening U.S. terms of trade, it implies that real GDP growth was more like 2% than 3.1%
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Decreased GDP doesn’t necessarially mean a decreased net personal income because it excludes the difference between GDP and GNP.
Mr. Karlsson, can you please tell me what relationship the measurements of money supply (such as M3) might have to the published GDP figures? Over time should one see M3 going up more or less at the same rate as GDP, and if it doesn’t, is that a symptom of any kind of imbalance or of inaccuracy of the GDP figures? Thank you!
Apparently, the Canadian statistics authorities underestimated U.S. exports to Canada in November by over a billion dollars. This increases the probability that the third quarter trade gap forecast will be met, but it is still more likely to be upwardly revised than downwardly revised.
billwald: You’re right that GDP does not include the flow of factor income and could possibly for that reason either underestimate or overestimate income levels. But for most countries inluding the U.S. the difference is usually more or less insignificant (less than 1% in America) and fairly stable.
Ohhh Henry: Over longer period of times, GDP and M3 have increased at fairly similar rates, albeit somewhat higher for M3. Since 1979 nominal GDP has increases 350% and M3 has increased 420%. But the short-term correlation is often very weak.
This could conceivably imply errors in GDP-or that M3 is not the beast measure of money supply. But this is in no way necessarily the case as there is no real reason to believe that money demand apart from the transactions included in GDP will remain stable over time.
I of course meant “best measure” in the first sentence in the last paragraph and not anything else…
I am a layman to the M3 concept, hence the late post about this argument. Is it a fair statement to say that the M3 provided us with a measure of foreign and domestic creation of monies by banks through Eurodollars and Repro agreements? I am guessing I am way off base with my assertion, but this is why I am asking.
Oh and thank you very much this is a very interesting econblog.
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