How bad can things be with almost a 5% growth rate of the real economy?
The Commerce Department yesterday revised up its estimate of 2007:Q3 GDP. They now report that U.S. real GDP grew at a 4.9% annual rate during the quarter, up from the 3.9% figure in last month’s “advance” 2007:Q3 estimate. The key factors in the upward revision were higher estimates of inventory accumulation and U.S. exports.
A higher level of inventories brings little reason to cheer, and 1% of the 4.9% total growth now claimed comes from this source. But the higher level of exports is unambiguously welcome news. One benefit of the weaker dollar is that it makes our exports more competitive. The export gains were led by a surge in the volatile commercial aircraft component, with exports of civilian aircraft, engines, and parts up 80% at an annual rate in the quarter, accounting by themselves for 18% of the total gains in exports of goods and services. But substantial gains were seen across a broad category of other exported goods:
| Category | growth rate | percent of total |
|---|---|---|
| Foods, feeds, and beverages | 41.1 | 10.3 |
| Industrial supplies and materials | 19.6 | 19.2 |
| Capital goods, except automotive | 27.8 | 38.4 |
| Automotive vehicles, engines, and parts | 40.7 | 14.8 |
| Consumer goods, except automotive | 21.3 | 10.0 |
| Other goods | 2.9 | 0.5 |
| Services | 4 | 6.8 |
Stronger exports help not just to support domestic production and employment, but also bring some relief for our international borrowing needs. But we still have a long way to go. Despite these export gains, the U.S. nominal trade deficit for 2007:Q3 stood at a $694 billion annual rate. That’s $105 billion less than 2006:Q3, but still represents a vast sum of money. To update Brad Setser’s metric, the $7.5 billion chunk of Citigroup sold off to Abu Dhabi would cover us for about half a week before we’d need to raise some more funds to finance the ongoing negative net exports.
I also share Menzie’s doubts about whether net export growth alone could sustain the expansion. The ongoing housing recession has continued to subtract 1% from GDP growth each quarter, and has been counterbalanced by a 1% positive contribution from nonresidential fixed investment and 2% from consumption growth. But initial indications are that consumption growth slowed in October ([1],[2]) while commercial construction spending has turned negative ([3],[4]).
So yes, the third quarter now looks pretty good, but offers us little assurance that the numbers are not about to turn distinctly less favorable.
Technorati Tags: GDP,
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Looking back at your comments on Edward Leamer’s paper, you were skeptical of his kernel regression methodology:
https://econbrowser.com/archives/2007/08/report_from_jac.html
Do you think that completely invalidates his conclusions about residential investment being a leading indicator of recesssions?
If not, then four quarters of negative contributions from residential investment should be a concern, especially if things get worse before they get better?
There’s also this interesting post from the WSJ Econ blog about differences in income vs expenditure:
http://blogs.wsj.com/economics/2007/11/29/gross-domestic-income-tells-different-story-than-gdp/.
Not that I’m arguing for the sad face here, but there are some interesting sub-currents.
PS
Given that current aircraft exports are driven by orders placed years ago I doubt that the recent drop in the dollar had a significant impact on aircraft exports.
Nice illumination on exports, Professor.
Ugly October numbers released this morning: falling real personal consumption expenditures, falling real disposable personal income, falling commercial construction spending.
http://www.bea.gov/newsreleases/national/pi/2007/pdf/pi1007.pdf
Feels like the recession is underway.
Hilarious, almost.
Yesterday, OFHEO reported the second largest decline in quarterly home prices on record. Earlier, Case Shiller showed continued ugly declines in home prices. Some time ago, we saw ugly stats on home vacancies.
Don’t worry, though; all is well: real outlays on housing services, 14% of personal consumption expenditures, were UP in October, per BEA:
http://www.bea.gov/national/nipaweb/nipa_underlying/TableView.asp#Mid
Unbelievable.
Feels like the recession is underway.
Maybe. Some day it will surely be here. Nothing goes on forever.
But just now the real economy is growing at 5%. It feels like a recession but it is boom time.
I don’t think we are at risk of an economy-wide recession unless the S&P500 dips below 1300.
It is arguable that half of the housing bubble correction is already behind us. Note that declining home prices are bad for some percentage of owners, but are good for first-time buyers (young people and immigrants) who were previously priced out.
Historically, the quarter before the onset of a recession tends to have a high GDP number partly due to involuntary inventory accumulations, which trigger the inventory correction cycle. How many people want to bet that q42007 will turn out to be the starting quarter of the newest recession?
The stock market is not predicting a recession, but consumer confidence has fallen so much in the past 3 months that in the past, it was usually followed by a recession; the entire yield curve (save 30year) has been under the fed funds rate for more than a year, an incidence that is so rare I know not whether there were many such episodes in the past; and the senior loan officer survey shows that the percentage of banks that have tightened lending standard is as high as before the 1991 recession — all in all, we have to be damn lucky to not get into a recession in the next 12 months … but the FOMC seems to be pretty confident about this luck thing …
Note that declining home prices are bad for some percentage of owners, but are good for first-time buyers (young people and immigrants) who were previously priced out.
Note that in the Northeast, prices still need to fall a long way for young people and immigrants to be priced-in. No more easy money…
Note that in the Northeast, prices still need to fall a long way for young people and immigrants to be priced-in. No more easy money…
So the further it falls, the more people can enter the market again! That is good.
Also note that falling home prices also make it hard for inflation to increase much, thus keeping inflation under control, and allowing the Fed to get the FF Rate down to the ideal 3.5% range.
US Debt and Reciprocal Money Expansion
This holiday will see a 300 billion or so US dollar increase in the American (and global) economy – a good percentage of those billions as credit card debt. Whether it is deficit spending for the Iraqi oil fields from the empty US social security lock box, buying holiday Chinese Snow Baby eqivalents on credit cards against personal future earnings, or too good to be true deals on 500,000 dollar homes unsupportable by American wage and cost of living inflation realities- deficit spending against furure earnings and tax collections – will temporarily, very temporariy at this point – push the economy on a very overstretched long string and likewise temporarily expand the money supply. The summation money and credit growth is exactly reflected in the daily growth and decay quantum valuation fractals and the summation of the evolving quantum fractal patterns of competing debt, equity, and commodity investment entities. Even the currencies follow the precise fractal growth and decay patterns found in The Economic Fractalist’ relative to each other’s valuations. The recent fractally predicted change in the valuational direction of the dollar – on the new blog ‘Lammert’ – against other world currencies is both a currency fractal saturation phenomena and can be qualitatively explained by the fact that most of the world’s debt is denominated in US dollars. The fractal saturation area of the Swiss Franc, Euro, and British pound is timed precisely when massive repayment is being called due by lenders and those indebted must sell other currency holdings (and gold) to gain dollars to repay that debt. The non US currency saturation area is also timed with the 11-14 week area of equity devolution – after which the dollar will have much more equity purchasing power. For the composite equities lowly New Century holds the secret of devolution. Observe the evolving New Century fractal pattern. On 30 November New Century closed down over 16 percent at 2 pennies even. (Both the 19 July 2007 and 11 October 2007 Wilshire highs were precisely predicted by saturation quantum fractal analysis.)
More competitive exports will also mean inflationary pressure. Fed’s interest rate cuts will probably be quite short-lived.
Q2 and 3 were a inventory fiasco. Way to much buildup for a consumer that wasn’t consuming at that speed anymore. Q1 2008 will feature impressive losses from Residential Investment and Structures at the same time. A sector wide bust of RE at the same time not seen since the 2nd half of 1990. Ouch!!!!
The sad thing is, this Christmas looks the worst since 2001-02………..after the recession. This is before the recession. Ouch!!
The last leg to fall will be commodities. Oil and food prices will crash as the speculative forces consume themselves and deflation will occur sectorwide and the Plains Ag boom will end violently sending the economy further reeling. If you are out of debt and have a modest cash flow, you are in good shape.
I love the bears. They’re so cuddly and huggable. They even have fractals!
The Carnival of the Capitalists for December 3, 2007
Welcome to this week’s edition of The Carnival of the Capitalists, a collection of the best blog posts on business and capitalism from the last couple of weeks.
But, first, an intermission to toot my own horn. As a freelance commercial writer, I …
Thanks for this graphical representation of the major GDP components by quarter over the last year, JDH. So much in such a small package…now if I weren’t so color challenged.
I think the role of imports is worth mentioning: all negative but for q2, and therefore adding to GDP…about 1% in the last quarter, yes?
Secondly, inventories over the past year uniformly building each quarter…giving me my first indication that consumption is slipping, yes?
Just not in relation to q2, it appears (I am too lazy to look to see if these numbers are SAAR). I don’t have a good reason why consumption would be up from q2 unless the change in the price of oil had something to do with it.
So the strength in the 4.9% q3 GDP number for me is the consumer’s continuing drop in consumption, masked by a building inventory…which means less has to be produced later to meet this (possibly still declining) consumption. Even deducting 1% for each still leaves us with ~3%GDP though which still looks better than this economy feels.
The strength in exports dominated by “capital goods” and not finished products, a little disturbing if the hope is to cultivate “value added” exports to climb out of this “soft spot”.
Calmo, imports are subtracted when calculating the level of GDP. Therefore, if imports go up from one quarter to the next (as they usually do), they make a negative contribution to that quarter’s GDP growth. The exception, as you note, is the second quarter when imports shrank and therefore the change made a positive contribution to the 2007:Q2 GDP growth rate.
You are exactly correct that the persistent inventory accumulation means that final sales growth was weaker than GDP growth.
I don’t know that I’ve ever been exactly correct James, but thanks anyhow.
I think I was trying to say that an inventory build foreshadows trouble ahead for an economy that is so heavily weighted by the consumption component. So although 4.9% GDP q3 is heady, part of that number (the inventory) contains some bad news for subsequent quarters –it has a dispositional character. Sorta like describing a ball’s diameter: 4.9 inches but also the tension on the threads keeping it together (the inclination to assume a smaller diameter). The interdependent nature of the variables is not easily cast by the statistics (maybe only for me).
I am glad you and Menzie are here providing guidance for us recreational types.
So glad that JDH and calmo mentioned imports. One of my friends insists that imports are procyclical — thus the very slow growth of imports is signaling a significant slowdown in GDP growth just ahead. Comments?
pat, the bar graph shows a deterioration in Imports, yes? Over the past 4 quarters only the 07q2 was counter trend (cheaper oil prices?)…meaning good news for our trade balance and possibly even a renavigation to “living within our means”…and increases in GDP as Imports subtract from the tally as mentioned above.
So this goes against one of your friends insistences (but hey she prolly has way better looking ankles than mine)…unless she meant Inventories, rather than Imports…and mounting inventories do I think “signal a significant slowdown in GDP growth just head”. Auto production speaks volumes, yes?
calmo,
Thanks for the answer. I need to check with my friend, but I think he will argue that final domestic sales have been slowing down and the overall slowdown is just ahead. Basically, he claims that it is an empirical fact that imports are positively correlated with GDP growth a few quarters ahead, and I am not sure whether he is correct (as for his ankles, it is too cold where I live to check them out. I’ll have to wait till next year’s BBQ party or something — but you can show a picture of yours in the meantime 🙂 )