Here at The Long Run Blog, our intent is to apply critical thinking to economics, money and finance. That doesn't mean we will always be 100% right, but it won't stop us from taking a skeptical look at economic news. Yesterday, a interesting piece of data came from the Commerce Department- revised GDP. GDP for each calendar quarter comes out first as and "advanced" number meaning it is very preliminary based on a lot of estimated data. Later it is revised as early estimates are replaced with better data. This is called "preliminary" GDP. Eventually, enough data rolls in that they make a final adjustment. Yesterday, we got the preliminary number.
Here is what's weird: GDP was negative in the 4th quarter of 2007 to the tune of -0.2%, then slightly positive in the 1st quarter of '08 at +0.9%. Initial estimates for 2Q were +1.9% due to the simulus package. Yesterday that was revised to +3.3%! Something seems odd in this pattern, doesn't it? We know the credit crisis has deepened, housing has gotten worse, oil spiked in 2Q and the dollar was weak- how could the economy have possibly grown at 3.3%?
According to the report, exports surged 13.2% while consumer spending nearly doubled from Q1's pace (0.9% to 1.7% in Q2). In other words, the weak dollar helped make U.S. goods and services cheap while stimulus checks were spent. While Wall Street cheered as the Dow surged 213 points or 1.9% and pundits speculated that maybe the U.S economy has turned a corner and things are beginning to improve. My skeptical eye leads me to think this is false hope.
First, consumer spending was boosted by non-recurring stimulus checks. How will consumer spending be boosted when American's net worth is shrinking on several fronts (housing, stocks, wages, employment)? Second, the surge in exports may be a statistical blip, an outlier if you will. Certainly the weak dollar helps, but the dollar is now strengthening, so how long will exports continue to surge? Interestingly, imports fell -7.6%, meaning that Americans didn't spend strongly across the board.
This GDP report is likely to be revised down in a few months, but regardless I have doubts about how useful this number is in confirming the state of the economy. Bear in mind, I am not forecasting here- only challenging the reasoning behind adding something like $300 billion in value to the stock market in one day because of a seeminlgy inconsistent piece of data. One data point a trend does not make.
If interested, the GDP report can be found here and the breakdown of components here.
Subscribe to:
Post Comments (Atom)
I heard an interesting tidbit on Marketplace yesterday. They were saying that the weakened dollar and the high cost of shipping was leading to strengthening of US companies that have been losing to importers for decades. According to the report, foreign manufactured goods have been creeping up in price where domestic goods have maintained price.
ReplyDeleteIf consumer spending stayed the same for Quarter 2 as it was for Quarter 1, but that spending was shifted away from imports and to goods manufactured in the US, how would that effect the GDP?
Great points. Thanks for asking.
ReplyDeleteI think that is a legitimate observation, that high oil and a low dollar are strengthening exports. Yet both trends have begun to reverse, so I don't question the theory, I question it's sustainability. It may be sustainable, but there isn't enough data to say for sure yet.
If consumer spending shifted domestically away from imports, that would be a net positive for the US economy temporarily. The problem is that you can't predict the 'downstream' reaction. In other words, if we import less then growing economies in Asia will find their exports falling, which means in turn they have less need to buy our exports. Sounds circular right? It is. The variable in determining if such an impact is meaninful depends on the magnitude and duration of the change, but also what *else* happens to economies. In applied economics, unlike the lab, all else is *not* equal.
I swear I listen to news sources other than Marketplace. With that said, I heard an article on Marketplace this morning that said other nations are following the US lead and issuing "economic stimulus packages" to their own people.
ReplyDeleteThis may be part of the downstream that you are talking about, Brett. We bailed out our canoe and splashed some water in everyone else's boats. When they start bailing, some of that water is going to come back at us.
I like the analogy. It certainly could happen that way. This helps make the case why predicting the future is so tough doesn't it? Lots of unforseen events. Of course, there is still a huge amount of money being destroyed in the worldwide banking system and small stimulus checks are a small drop in that lake. That is the biggest elephant in the room right now and it is not a quick fix. We'll see, but it will be interesting to see how it unfolds won't it?
ReplyDelete