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Thursday, May 25, 2006

GDP Surprises

Real GDP has grown at a 4 percent annual rate ever since the second quarter of 2003, when marginal tax rates were reduced on dividends, capital gains and human capital (professional and managerial salaries). Real GDP from nonfarm businesses did even better – rising at an annual rate of 4.7 percent. Some call that a coincidence.

What has been most surprising is that the economy did so well despite the burden of increasingly expensive imported oil. Part of the answer is that U.S. exports have grown very rapidly -- particularly exports of manufactured and farm goods rather than services. Since the third quarter of 2003, real exports of goods have increased a 9.7 percent annual rate, while imports of goods (including oil, of course) increased at a 9.2 percent rate.

The GDP report contains a useful measure of inflation which minimizes the use of estimates and is instead “based on household expenditures for which there are observable price measures.” It is called Market-based PCE (personal consumption expenditures).

With energy and food included, the market-based PCE rose at 3.9 percent rate in the third quarter of 2005, 2.6 percent in fourth quarter and 1.7 percent in the first quarter of 2006. The “core” version, without food and energy, was 1.5 percent in 2004, 1.7 percent in 2005 and 1.6 percent in the most recent quarter. Food is essentially irrelevant -- energy alone is what creates the statistical illusion of inflation (such as that 3.9 percent annualized figure in the third quarter).

Aside from the relative price of energy, I have yet to see anyone present any evidence of higher inflation. I have seen many words about higher inflation, but no facts. The consumer price index less energy rose 2.2 percent in 2004 and 2005 and it also rose 2.2 percent for the 12 months ending in April. The April PPI was only 0.8 percent higher than a year before.

Rising energy costs do reduce real wage growth and squeeze profit margins in energy-gobbling industries. Yet U.S. business has been coping surprisingly well.

If it ain’t broke, don’t ask the Fed to fix it.


tbmbuzz said...

An important factor in the robust U.S. economy of the past quarter century is the increased efficiency of the economy. The energy budget per unit production is significantly less, for both consumers and businesses, than it was 30 years ago. Thus, energy price shocks simply do not have the same effect they had in the 1970's. Not so coincidentally, environment clean-up efforts have been wildly successful. The result has been the highest standard of living and life expectancy in history. (Not that the doom and gloomers will ever admit these simple facts).

D said...

Now if the yield curve wasn't so flat, and the real median wage rose a bit faster, I'd be just as surprised.

Anonymous said...

It isn't reasonable to expect real wage rates (wages adjusted by the total CPI) to rise at times when oil prices increase by enormous amounts. Nothing about a surge in energy costs makes it any easier for employers to pay higher wages. On the contrary, it has the opposite effect because the U.S. is such a big net importer of energy. The growth in real disposable income per capita is nonetheless impressive, given that very big drag.

D said...

"...real disposable income per capita..."

That is averaged income (per capita), offcourse it's going to grow, once you factor in executive wages. There's a reason why I used the term "real median wage". Meanwhile, everything that this administration is touting, isn't even adjusted for inflation.

I've probably read the same dissenting opinion you have, which is Krugman, and Robert Reich, and I simply have a very hard time believing that this growth isn't on borrowed money, which is ok, as long as we can realistically manage our debt.

Tlaloc said...

A nice article that explains why it is that the economy is so bad even as the indicators try to tell us it is so good: