About Those GDP Numbers

Look, we've spent something like 4-5% of GDP in stimulus, from the American Recovery and Reinvestment Act (a.k.a ARRA a.k.a. stimulus bill) to the bailouts. (You can track ARRA spending here and bailout spending here.) We've spent about $120bn in ARRA and $575bn in other bailouts. That represents about 5% of GDP spent in deficit by the government: $700bn/$14.25tn. Those expenditures affect GDP evaluations, since GDP = Consumption + Investment + Government + Net Imports. If GDP's "natural" state rate now if government spending had stayed constant is negative 1-2%, then that translates into roughly 4% growth: -1 + 5 = 4. We actually got 3.5%, which is right in the back-of-the-envelope range.

But it's unclear if that means anything good. If the fiscal multiplier is greater than one, as CEA head Christina Romer believes, then that spending should have led to higher reported GDP than we actually saw (something like 5-6%, using Romer's estimate of the multiplier as close to 1.5)*. If the multiplier is less than or equal to one, as these folks argue, then at best this quarter's GDP report is a statistical mirage based on an accounting identity rather than actual economic improvement. If the multiplier is close to zero or even negative, as Robert Barro thinks, then economy is in great shape indeed.

I tend to take the middle view: the multiplier is probably close to 1 most of the time (although context is important), and I think the present circumstance backs that view up. In the 2nd quarter, GDP fell by about 1%. The government spends about 5% of GDP in deficit, and the next quarter GDP grows by about 3.5% despite falling employment. Coincidence?

This is one reason why talk of a "jobless recovery" is at least partially missing the boat: there hasn't actually been a recovery yet. We've just pushed some numbers from one side of an accounting ledger to other by taking on more debt and called it progress. It's not.

*Yes, I know that the lags matter too. But these, too, are unclear and you could just apply the same argument to next quarter or several.

Comments

[DiggerUK:]

The article shows the correlation between the percentage of GDP as stimulus, and the increase in GDP.

On another forum, a cynic claimed the Chinese increase GDP by getting a million people to dig a thousand holes. Then immediately double the GDP gained, by getting another another million people to fill them in again.

I'm trying to come up with a smart arse comment about when to stop digging, but I'm losing the will to live.

Oct 30 08:30 AM

[Dave Wrixon:]

The only problem with that argument is that the Chinese Government does deliver infrastructure, but Obama does not. OK, I will hang on for the Roads to Nowhere argument, but that will only reflect misguided contempt in the US for anything that happens outside it boarders. That contempt will eventually extract a heavy price.


On Oct 30 08:30 AM DiggerUK wrote:

> The article shows the correlation between the percentage of GDP as
> stimulus, and the increase in GDP.
>
> On another forum, a cynic claimed the Chinese increase GDP by getting
> a million people to dig a thousand holes. Then immediately double
> the GDP gained, by getting another another million people to fill
> them in again.
>
> I'm trying to come up with a smart arse comment about when to stop
> digging, but I'm losing the will to live.

Oct 30 08:43 AM

[Mad Hedge F...:]

lds Those of you who heeded my GLOBAL RISK ALERT on October 13(click here for report at www.madhedgefundtrader...) missed the top of the market by six trading days and 10 S&P points. I’m sorry; I’ll ring the bell more precisely next time, with a more accurate date and time. Since then, technical sell recommendations have been breaking out like acne at a junior year prom dance. You are all now out of your positions or love them so much that you are willing to carry them through another crash. At the risk of hubris, even PIMCO’s Bill Gross has jumped on the bandwagon, although I doubt he needs my help ascertaining the direction of stocks and bonds. The way everything turned tail and ran at exactly the same time was a complete vindication of my theory that a tsunami of liquidity was raising all boats, completely unjustified by the underlying fundamentals. Long time readers of this letter know the only short I have advocated this year was in long dated Treasury bonds through the TBT. But the better than expected Q3 GDP of 3.5%, obviously fueled by temporary government programs like “cash for clunkers” and the first time homebuyers tax credit, may be presenting one of those pristine, “sell on the news” moments. Will this data finally give us our long awaited double top? Fading rallies in stocks is looking more enticing by the day.

Oct 30 08:47 AM

[Donald Ingram:]

"there hasn't actually been a recovery yet."

BINGO! Hit the nail right on the head! All this talk of the recession being over, is just that - a bunch of talk. Once the stimulus tap is turned off, and it will be at some point, the following GDP number will reflect that. Benny, Timmy and Hank are hoping the consumer will come riding in and save the day. Ain't gonna happen! They are too busy just making ends meet while trying to pay down debt and save a little. Recession over? No. Don't think so.

Oct 30 11:33 AM