Template For Evaluating GDP

by: Jeffrey Snider

The Bureau of Economic Analysis (BEA) will release its advance estimate for Q2 2016 GDP today, along with benchmark revisions that may render this entire discussion moot. By all expectations, GDP is believed to have rebounded from Q1's 1.07% predicated on little more than that April through June was not nearly as bad as January through March. In fact, as noted here, it is entirely consistent that GDP will be higher by comparison - and that is the trouble. This will mark the third straight year of this uneven economic stature.

As of the last forecast from the Atlanta Fed's GDPNow model, the prediction is for just 1.80% in Q2. That would represent less than half of Q2 2015's pace, and just barely two-fifths of Q2 2014.

ABOOK July 2016 PreGDP GDPNow Click to enlarge

That would suggest 2016 is off to the worst start since 2011 despite the relatively higher "down" quarter of Q1. If that is what the BEA in fact estimates, then it confirms the general trend of the slowdown in the US economy over the past two years which neither the US nor the global economy can really afford.

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This second lap of the "rising dollar" may have taken a full percent off last year when weakness was, by mainstream account, certain to be "transitory." And it would be nearly half a percent less than the Polar Vortex of 2014 that was also supposed to be nothing more than an "anomaly."

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This is a more accurate perspective for evaluating the economy rather than the binary or linear approach used by economists. By this count, at even 1.32% (SAAR) for the first half of 2016, it tremendously understates the level of not just weakness but disruptive condition. An actual recovery consistent with the 3.5% growth baseline that existed for decades before the 21st century would mean real GDP of $20.98 trillion; at 1.80% Q2 growth, that would suggest today's update will show instead $16.58 trillion. The assumed divide between positive and negative numbers is rendered wholly meaningless by that comparison.

Instead, both the recurring pattern and the relatively worse iteration of it this year confirm the continued depression - a more than temporary deviation of economic circumstances from potential. Full employment at a rate of almost $21 trillion is much, much different than "full employment" at only $16.6 trillion. And all that is before the benchmark revisions.