Man Without Qualities

Thursday, August 28, 2003

About That GDP Rise

The news today is full of reports of the revised Commerce Department figures showing that the American gross domestic product grew at an annual rate of 3.1 percent in the second quarter, and that the unexpected strength is leading economists to raise their forecasts for the rest of the year. Inflation remained low.

The 3.1 percent growth rate, after adjustment for inflation, is up from the initial estimate last month of 2.4 percent growth in the gross domestic product. But that 2.4 percent growth was already well above the 1.5 percent rate of increase that most Wall Street economists had been forecasting.

In other words, the United States economy grew in the second quarter at more than twice the rate most Wall Street economists had been expecting just last month.

The upward revision is reported to have mostly been caused by higher consumer spending, stronger exports and a reduction in the estimate of imports. Personal consumption expenditures, adjusted for inflation, rose 3.8 percent and spending on business equipment and software rose 8.2 percent. Inventories fell by $20.9 billion and defense spending increased strongly. Corporate profits continued their strong recovery. Richard Berner, chief United States economist at Morgan Stanley, said third-quarter growth could be as high as 5 percent.

That last prediction is interesting because Herr Doktorprofessor Krugman opined only days ago:

Just to stabilize the labor market in its present dismal state would probably take growth of at least 3.5 percent; it would take much more than that to return the economy to anything resembling full employment. ... The best guess is that growth in the second half of the year will be faster than in the first half, possibly high enough to create some jobs, but not high enough to make jobs easier to find. In other words, in terms of what matters most, the economy will continue to deteriorate.

I wonder if an annual growth rate of 5% counts as much more than 3.5%? What's really strange is that today all these economists in the news - like Richard Berner ("Earnings are growing faster than top-line growth," Mr. Berner said, "and that is good for future profits and for the hiring back of workers.") and James E. Glassman ("The third quarter is stacking up to be a 4 to 6 percent quarter."), senior United States economist at J. P. Morgan - seem to be saying that the very same dynamics that generated that 3.1% number for the second quarter are making those economists predict rates of growth in the 5% range for the third quarter. But Brad DeLong already told everybody on August 15 - the very day Herr Doktorprofessor Krugman's "Twilight Zone" column appeared - that The betting now is that the latest GDP growth number will be revised upward to a 3.0% annual growth rate. Surely Herr Doktorprofessor Krugman was in on that betting!

Wasn't a numbers man like Paul Krugman already resetting his third quarter growth predictions for the 5% range back on August 15, when the "betting" on a second quarter number was north of 3% - or at least allowing for that likelihood? But his August 15 column says that growth in the second half will not be high enough to make jobs easier to find. So I guess that means 5% is not much more than 3.5%!

And what are we to make of the following dollop, also from Herr Doktorprofessor's August 15 column - when the "betting" was already that the GDP growth number for the second quarter would be revised upward to a 3.0% annual growth rate:

All this is, of course, an indictment of our economic policy — a policy that has managed the remarkable trick of generating immense budget deficits without giving the economy much stimulus. But that's a subject for another day.

Maybe "another day" has now arrived?

I must consult the handbook from my correspondence course materials from the Paul Krugman School of Obfuscatory Prediction Writing. Surely the answers are all there in the footnotes! But, so far, the only optimism I can find is that SARS is unlikely to have utterly destroyed our civilization by now.

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