About the GDP number

Back in April I predicted a weak 2nd quarter RGDP number, mostly due to the sequester.  Tomorrow morning we will find out whether I was right.  In any case, I still expect about 2% RGDP growth for 2013, about the same as 2012.  I doubt the fiscal austerity will have a significant impact, due to monetary offset.  Although I certainly concede it might slow growth in Q2.

Morgan Warstler sent me an article that’s much more optimistic about GDP growth than I am, which makes some interesting points.  It’s not really my area of expertise, so I don’t quite know what to make of numbers like tax revenue rising 6% even adjusted for tax rate increases:

Judging by the figures for growth, the U.S. economy is in the doldrums. Labor-market data tell a more positive story.

Payrolls climbed by 202,000 a month on average from January through June, up from 180,000 in the second half of 2012, according to the Labor Department. Such gains are typically linked with gross domestic product growing close to 3 percent, about double what government data may show next week, say economists at UniCredit Group and Deutsche Bank Securities Inc.

“The employment numbers are closer to the true picture,” said Harm Bandholz, chief U.S. economist at UniCredit in New York and the top payroll forecaster in the past two years, according to data compiled by Bloomberg. “I’m confident GDP growth will pick up in the second half and even more in 2014.”

The weight of the evidence also tips the balance toward a more favorable outcome as federal tax receipts rise at the fastest pace in six years, measures of consumer confidence reach the highest levels since at least 2008, and sales of autos and homes and housing rebound. That helps explain why companies from General Electric Co. (GE) to Texas Industries Inc. (TXI) plan to keep investing and hiring.

After adjusting for the increase in rates that took effect this year, employee income-tax withholdings were up about 6 percent in June compared with a year earlier, the best showing for that month since 2007, according to calculations based on Treasury data by Joseph LaVorgna, the New York-based chief U.S. economist at Deutsche Bank. More receipts point to gains in employment, rising wages or a combination of both.

Tax Receipts

“Tax receipts are confirming the improvement in the labor market, but GDP seems to be overstating the weakness in output,” said LaVorgna. GDP in the first half of the year gives the impression of a “lousy” economy whereas it’s actually been “decent,” he said. It “reinforces the view that the second half will be better.”

.  .  .

Growth in the first half of 2013 was restrained by the effect of federal government cutbacks and increase in taxes which is likely to wane. Slower inventory building and a wider trade deficit also curbed the expansion last quarter, when GDP rose at a 1 percent annualized rate, according to the median forecast in a Bloomberg survey ahead of Commerce Department data due on July 31. The economy grew at a 1.8 percent pace in the first quarter.

.  .  .

Expanding job openingshome prices that are growing at the fastest pace since before the recession and record-high equity values are helping shore up household confidence. The Bloomberg Consumer Comfort Index (COMFCOMF) climbed last week to match the highest level since January 2008 as Americans grew more upbeat about the economy. A similar measure from Thomson Reuters/University of Michigan issued today reached a six-year high for July.

More confident consumers are spending on big-ticket items. Cars (SAARTOTL) and light trucks sold in June at the strongest pace since November 2007, according to Ward’s Automotive Group. Ford Motor Co. (F) on July 23 said it will hire 3,000 salaried employees this year, 800 more than originally planned.

Housing Rebound

The housing rebound is another sign of an improving economic outlook.

.  .  .

Annual Revisions

The disconnect between hiring and growth may begin to narrow when, along with second-quarter growth figures, the Commerce Department next week issues GDP revisions, said Neil Dutta, head of U.S. economics at Renaissance Macro Research LLC in New York.

The government annually updates the growth data by incorporating more complete information that is only available with a lag. This year will be a more comprehensive overhaul, something that is done about every five years, and will include changes in the way GDP is calculated, which could potentially affect the figures back to 1929.

GDP “looks increasingly like the outlier” relative to other data such as corporate profits, said Dutta. “Overwhelmingly, the signals are that the economy is not only doing OK, but doing better than a lot of people think.”

A stronger economy would make Federal Reserve projections easier to achieve this year and next, said Dutta. In June, Fed officials forecast the U.S. will grow 2.3 percent to 2.6 percent this year and 3 percent to 3.5 percent in 2014.

Income Gains

Gains in income and profits are another sign that growth is probably stronger than currently thought, according to Joseph Carson, director of global economic research at AllianceBernstein LP in New York.

Fed research has shown that gross domestic income, or the money earned by the people, businesses and government agencies whose purchases go into calculating growth, is a better gauge of the economy. After multiple revisions over time, the growth estimates tend to align more closely with the income figures, rather than the other way around, according to a 2010 paper by Fed economist Jeremy J. Nalewaik.

GDP has increased at a 3.4 percent annualized rate since the third quarter of 2012 before adjusting for inflation, while GDI grew at a 4.9 percent pace, Carson said. He projects the economy’s growth rate will be revised up for the past few years when the update is released on July 31.

Lingering Effects

While the lingering effects of the worst recession in the post-World War II era — including diminished productivity following the plunge in business investment — have contributed to slower growth, “it’s certainly credible that the GDP number has been undercounted,” said James O’Sullivan, chief U.S. economist at High Frequency Economics in Valhalla, New York.

“The employment data are strong enough already to be consistent with at least a 3 percent pace of GDP growth,” he said.



18 Responses to “About the GDP number”

  1. Gravatar of TravisV TravisV
    30. July 2013 at 18:35

    2% RGDP growth? Given the fall in inflation, doesn’t that suggest that 2013 NGDP growth % will be substantially lower than 2012 NGDP growth %? How much lower?

  2. Gravatar of TravisV TravisV
    30. July 2013 at 18:37


    “White and Reis report that Summers is the White House’s #1 choice right now, although nothing is settled.

    What’s key is that the piece has a roundup of all of the arguments from the Summers camp against the biggest anti-Summers complaints. Specifically it addresses claims of sexism, that he’s uncomfirmable, that he caused the meltdown, and that his views on monetary policy are a wildcard.

    Here’s part of the section on Summers and monetary policy….”


  3. Gravatar of justin irving justin irving
    30. July 2013 at 18:46

    I don’t have too much faith in these gdp numbers until the third print, when we can average gdp and gdi.

  4. Gravatar of TravisV TravisV
    30. July 2013 at 18:48


    New from John Hilsenrath: Larry Summers on QE:

    “A close reading of Mr. Summers’s columns and speeches, as well as conversations with people familiar with his thinking and a June interview with him, show that Mr. Summers has been skeptical about the benefits of the Fed’s huge bond-buying programs, known as “quantitative easing,” but that he also has said he sees few harmful side effects stemming from them.”

  5. Gravatar of Mark A. Sadowski Mark A. Sadowski
    30. July 2013 at 20:02

    I’ve developed my own relatively simple nowcast model based on the subcomponents of GDP using currently available monthly FRED data. (For example the last available new data was the Value of Manufacturers’ Shipments for Capital Goods: Nondefense Capital Goods Excluding Aircraft Industries for June on 7/25, which I used to project private fixed nonresidential investment.) My estimates for 2013Q2 have been consistently more optimistic than those of the major modelers. My current estimate is actually a frightenly high 2.0% RGDP growth for 2013Q2.

    I’m sure that the major modelers have access to better data than me, and their models are far more sophisticated, but it will be very interesting to see the final results and where who has been wrong and why.

  6. Gravatar of Mike Sax Mike Sax
    31. July 2013 at 01:03

    Thanks for the link Travis V. I wonder what that means for where Summers stands himself. If he’s chairman does he scrap QE-if it’s not doing much good why continue with it? I wonder if he has anything he thinks would work better.

  7. Gravatar of Mike Sax Mike Sax
    31. July 2013 at 01:07

    I guess this is supposed to reassure us that he’s not a hawk-which is the important question as far as I’m concerned. Still while I originally thought Summers would be as good as Yellen I’ve no been convinced that we want Yellen.

  8. Gravatar of ssumner ssumner
    31. July 2013 at 03:51

    Travis, 3.5%?

    And the Summers story is scary.

    Justin, I agree.

    Mark, Let’s see (I don’t have expertise in this area.)

    Mike, That’s good. WE need a united front against the White House.

  9. Gravatar of Brian Donohue Brian Donohue
    31. July 2013 at 04:02

    Good stuff Morgan. Thanks.

  10. Gravatar of TravisV TravisV
    31. July 2013 at 04:09

    By the way, Evan Soltas finds that Larry Summers actually did mention NGDP…..back in 1991:


  11. Gravatar of TravisV TravisV
    31. July 2013 at 04:30

    Prof. Sumner,

    Do you have a response to this criticism from Cullen Roche?


  12. Gravatar of Benjamin Cole Benjamin Cole
    31. July 2013 at 05:04

    I wonder if the way federal agencies gather economic data could not use a big revamp.

    Surely, with all sorts of data online now, we should be able to get something of a real-time view of economic conditions.

    I wonder if this problem of collecting data has been looked at lately….really we need census takers to look at prices in grocery stress? Not the online “tapes” of sales? House prices are online now, in a million slices on Redfin or similar services….

  13. Gravatar of W. Peden W. Peden
    31. July 2013 at 06:16

    2% is about the midway point of consensus forecasts for US RGDP growth in 2013.

  14. Gravatar of TD TD
    31. July 2013 at 06:22

    Now that 2012 has been revised upward to 2.8, don’t forget to revise your “2013 growth will be like 2012 growth prediction”. It would be very lame if we saw a 2% growth rate for the year and you declared predictive victory, considering the large changes to how GDP is calculated.

  15. Gravatar of TheMoneyIllusion » All hail Mark Sadowski TheMoneyIllusion » All hail Mark Sadowski
    31. July 2013 at 06:46

    […] Here’s Mark from yesterday’s comment section: […]

  16. Gravatar of ssumner ssumner
    31. July 2013 at 07:19

    TravisV, I responded to those comments in an earlier post.

    Ben, I agree.

    W. Peden, Yes, that’s right.

    TD, I always use Q4 to Q4 numbers as they are far more precise. The growth rate in 2012 was slightly under 2%. We are looking for a break in growth at the beginning of 2013, you don’t find that with Y over Y numbers.

  17. Gravatar of Potpourri, Peter Schiff Edition Potpourri, Peter Schiff Edition
    31. July 2013 at 10:10

    […] Incidentally, Scott Sumner has no problem challenging the government’s official numbers, just so long as doing so meshes with his worldview. But if it’s an Austrian person […]

  18. Gravatar of TallDave TallDave
    31. July 2013 at 17:31

    The problem with fiscal offsets is that GDP is just a number.

    For instance, GDP rose during WWII (and unemployment fell) but obviously living standards didn’t rise, hundreds of basic necessities were being rationed.

    Of course most of what the government does today isn’t quite as irrelevant to U.S. living standards as firebombing Tokyo, but on the other hand there’s a lot more of it now.

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