Economy grows, but warnings sound

[Special K]

Economy grows, but warnings sound
Recent growth is boosted by stimulus checks, but still lags forecasts. Last quarter of '07 is revised down - first negative period since 2001 recession.

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NEW YORK (CNNMoney.com) -- The economy, boosted by $90 billion in stimulus checks, grew at a faster pace in the spring but not as strongly as expected, the government reported Thursday.

The Commerce Department also lowered its readings on growth in the two previous quarters, resulting in the first negative measure since the 2001 recession. The report is likely to spur further debate over whether the economy has fallen into a recession.

The gross domestic product, the broad measure of the nation's economic activity, grew at an annual rate of 1.9% in the three months ended in June. That's up from a revised 0.9% growth rate in the first quarter.

Even with much stronger growth, the reading was weaker than expected, as economists surveyed by Briefing.com had forecast growth of 2.3%.

The first-quarter reading was revised lower from a 1% growth estimate a month ago.

The Commerce Department revised the fourth-quarter 2007 reading to a decline of 0.2%. The previous fourth-quarter reading was 0.6% growth.

Key to second-quarter growth was the economic stimulus program, which boosted consumer spending in the face of higher prices. Also adding to growth were strong exports, which were helped by a weak dollar that made U.S. goods and services more competitive overseas.

But some economists, most notably Federal Reserve Chairman Ben Bernanke, have worried that with those checks already cashed, spending and economic activity could now slow in the second half of the year.

Gross domestic purchases, a measure of how much American consumers, businesses and governments are buying, fell 0.5%, after a narrow 0.1% rise in the first quarter and a 1% drop in the fourth quarter, a sign of underlying weakness in the economy.

Robert Brusca of FAO Economics described the report as weaker than the 1.9% growth rate would suggest, saying that if it weren't for changes in imports and exports GDP would have declined in the quarter.

"The consumer adds only 1.1 percentage point to overall growth, and this is with a rebate check in hand," he said. "GDP was net negative on the domestic front. As we look to the second half of the year foreign growth is fading so U.S. exports are sure to slow. Also the rebate checks no longer are a factor. Meanwhile the housing sector is still a negative."

Mark Vitner, senior economist for Wachovia, said the report indicates growth is just narrowly above what would be seen in an outright recession, and that domestic demand is at the weakest level seen since the 1991-92 recession.

He said that while stimulus checks helped support spending, most was apparently spent on items such as food and gasoline, rather than big-ticket items. Spending on services by consumers also was weak due to a pullback in travel, Vitner said.

"We have long held that the best measure of the economy most consumers interact with on a daily basis is final sales to domestic purchasers," said Vitner. "On this basis the economy has actually been weaker than it was in the last recession."

Investment in housing fell for the 10th straight quarter, down 15.6% in the second quarter. Housing subtracted 0.6 percentage point from GDP, and a weak auto sector also subtracted nearly 1.1 percentage points as well, as spending on autos and parts plunged 9.4% in the face of record high gas prices.

Many people wrongly believe that a recession is defined as two consecutive quarters of GDP below zero. In fact, during the last recession of 2001 there never were two consecutive quarters of negative GDP.

The body that determines when the economy is in a recession, the National Bureau of Economic Research, does not focus on GDP. It looks at a variety of other economic measures, including employment, income controlled for inflation, wholesale and retail sales, as well as industrial production. It generally does not declare a recession until at least six months after it begins.

It appears the 4th quarter of 2007 experienced negative real growth after all. How many times do they revise their growth and inflation numbers before they are considered "final"?

Were the stimulus payments really such a good idea? It seems like all they did was give the 2nd quarter GDP an artificial boost, and will only delay the inevitable. Do you think the 3rd quarter GDP will be negative, after the most of the stimulus checks have already been spent?

Will the government issue a 2nd round of stimulus checks? Maybe the government will just keep sending everyone more free money so the country can spend its way out of this economic slump!

I think the last 2 paragraphs are especially important - I see many posts on here claiming that the only criteria for a recession is 2 consecutive quarters of negative GDP, when in fact the NBER uses a variety of measures to classify a recession.

 

[Engineer]

Originally posted by: Special K
I think the last 2 paragraphs are especially important - I see many posts on here claiming that the only criteria for a recession is 2 consecutive quarters of negative GDP, when in fact the NBER uses a variety of measures to classify a recession.

I saw that this morning. I had seen several people post the same thing but didn't know if it was right or not. I guess they were right indeed. Now if only CNBC and other finaincial shows would just get it right and quit spreading the misinformation on the definition of a recession.

It appears the 4th quarter of 2007 experienced negative real growth after all. How many times do they revise their growth and inflation numbers before they are considered "final"?

The article this morning stated that they revised (downward) several quarters including a few in 2005 so I'm not sure how far they go back. Lots of data and I assume some of it is estimated at first to be finalized later.

 

[ProfJohn]

They typically update the numbers 3 or 4 times I believe.

They release them, then revise them 6 months later then after a year and then 3? years down the road.

Interestingly they were debating when the 2000-2001 recession began for a long long time and spoke about a reevaluation of the start date but then never did anything.

 

[StageLeft]

All the biggest fvcking joke in years, second only to Iraq. First, it grew to the amount it did because the government gave money to the people to blow on crap (granted it was theirs, but it's not like the gov cut its spending to coincide with this tax give back).

Second, adjusted for inflation we've been in a recession at least for two quarters. If your GDP grows by 1.9% and your inflation is a few percent, sorry to break the bad news, you just contracted. It's like saying unemploymnet is down because those out of work were put to death.

Also, now there's talk of another stimulus package. This is hysterical. Why not $1Trillion next time? As one guy mentioned, though, there is already a stimulus package of half a trillion dollar deficit, so it's not like throwing money at people from the rooftops will help.

Without inflation considerations, GDP is MEANINGLESS. Look at zimbabwe, fastest growing economy in the world. It's just wool over the eyes of the proles to talk about a growing economy without noting that inflation has made the dollar substantially less valuable.

The gov could continue to grow GDP until the end of time, even with a population of 15 people if it kept stimulating and at the same time devaluing its currency.

 

[Special K]

Originally posted by: Skoorb
All the biggest fvcking joke in years, second only to Iraq. First, it grew to the amount it did because the government gave money to the people to blow on crap (granted it was theirs, but it's not like the gov cut its spending to coincide with this tax give back).

Second, adjusted for inflation we've been in a recession at least for two quarters. If your GDP grows by 1.9% and your inflation is a few percent, sorry to break the bad news, you just contracted. It's like saying unemploymnet is down because those out of work were put to death.

Also, now there's talk of another stimulus package. This is hysterical. Why not $1Trillion next time? As one guy mentioned, though, there is already a stimulus package of half a trillion dollar deficit, so it's not like throwing money at people from the rooftops will help.

Without inflation considerations, GDP is MEANINGLESS. Look at zimbabwe, fastest growing economy in the world. It's just wool over the eyes of the proles to talk about a growing economy without noting that inflation has made the dollar substantially less valuable.

The gov could continue to grow GDP until the end of time, even with a population of 15 people if it kept stimulating and at the same time devaluing its currency.

That's one thing I've always wondered about - often these GDP numbers are reported without an accompanying number for inflation. It was my understanding that two consecutive quarters of real GDP decline, i.e. (nominal GDP growth minus infation) was one metric used to classify a recession.

What number do they use to account for inflation when determining whether or not a given quarter experienced real GDP growth? Is it CPI? Core CPI?

 

[Engineer]

Originally posted by: Skoorb


Second, adjusted for inflation we've been in a recession at least for two quarters. If your GDP grows by 1.9% and your inflation is a few percent, sorry to break the bad news, you just contracted. It's like saying unemploymnet is down because those out of work were put to death.

GDP is given in inflation adjusted %. The "real" GDP is higher (i.e. inflation + 1.9%).

 

[Thump553]

Originally posted by: Skoorb
* * *
Without inflation considerations, GDP is MEANINGLESS. Look at zimbabwe, fastest growing economy in the world. It's just wool over the eyes of the proles to talk about a growing economy without noting that inflation has made the dollar substantially less valuable.
* * *

Speaking of Zimbabwe, there was a short but fascinating article in this morning's paper. They just devalued their currency by ten zeros, i.e. one billion Zimbabwe dollars (or whatever they call them) is now worth one Zimbabwe dollar. The reason was their computers, etc. couldn't keep up with the huge numbers for ordinary transactions.

The article also mentioned their inflation rate is currently the world's highest, officially it's 2.2 million percent annually but independent parties say a more realistic figure is 12.5 million percent.

Zimbabwe devaluation

 

[dphantom]

Originally posted by: Skoorb
All the biggest fvcking joke in years, second only to Iraq. First, it grew to the amount it did because the government gave money to the people to blow on crap (granted it was theirs, but it's not like the gov cut its spending to coincide with this tax give back).

Second, adjusted for inflation we've been in a recession at least for two quarters. If your GDP grows by 1.9% and your inflation is a few percent, sorry to break the bad news, you just contracted. It's like saying unemploymnet is down because those out of work were put to death.

Also, now there's talk of another stimulus package. This is hysterical. Why not $1Trillion next time? As one guy mentioned, though, there is already a stimulus package of half a trillion dollar deficit, so it's not like throwing money at people from the rooftops will help.

Without inflation considerations, GDP is MEANINGLESS. Look at zimbabwe, fastest growing economy in the world. It's just wool over the eyes of the proles to talk about a growing economy without noting that inflation has made the dollar substantially less valuable.

The gov could continue to grow GDP until the end of time, even with a population of 15 people if it kept stimulating and at the same time devaluing its currency.

I believe this is adjusted for inflation already.

 

[miketheidiot]

Originally posted by: ProfJohn
They typically update the numbers 3 or 4 times I believe.

They release them, then revise them 6 months later then after a year and then 3? years down the road.

Interestingly they were debating when the 2000-2001 recession began for a long long time and spoke about a reevaluation of the start date but then never did anything.

the initial figures are preliminary, and they immediately work to get a more accurate number, afiak, numbers don't really move much after 6 months, and this number is probably the final number.

 

[miketheidiot]

Originally posted by: Skoorb
All the biggest fvcking joke in years, second only to Iraq. First, it grew to the amount it did because the government gave money to the people to blow on crap (granted it was theirs, but it's not like the gov cut its spending to coincide with this tax give back).

Second, adjusted for inflation we've been in a recession at least for two quarters. If your GDP grows by 1.9% and your inflation is a few percent, sorry to break the bad news, you just contracted. It's like saying unemploymnet is down because those out of work were put to death.

Also, now there's talk of another stimulus package. This is hysterical. Why not $1Trillion next time? As one guy mentioned, though, there is already a stimulus package of half a trillion dollar deficit, so it's not like throwing money at people from the rooftops will help.

Without inflation considerations, GDP is MEANINGLESS. Look at zimbabwe, fastest growing economy in the world. It's just wool over the eyes of the proles to talk about a growing economy without noting that inflation has made the dollar substantially less valuable.

The gov could continue to grow GDP until the end of time, even with a population of 15 people if it kept stimulating and at the same time devaluing its currency.

i'm not 100% sure, but i think gdp growth numbers are weighted for inflation

edit: beat to it already

 

[Mark R]

Annualised growth of 1.9% isn't particularly reassuring given that there were 4% (annualised) of 'stimulus' checks sent out during that quarter.

 

[LegendKiller]

lol, people here are too funny. Don't even know what they're talking about re:GDP.

 

[dullard]

Originally posted by: Special K
It appears the 4th quarter of 2007 experienced negative real growth after all. How many times do they revise their growth and inflation numbers before they are considered "final"?

Generally they do two main revisions, once a month after the advance estimate comes out. For example at the end of Jan 2008, there is an "advance" number for the 4th quarter of 2007. Then you get a "preliminary number" at the end of Feb 2008 and a "final" number at the end of Mar 2008.

But, each summer, they go back and look at the previous 3 years of data to incorporate annual survey information. Thus, they will revise the "Final" 4th quarter 2007 number in summer of 2008, summer of 2009, and summer of 2010. The annual changes usually tend to be so minor that they don't need to be considered and they call the revision above "final".

And then, every ~5 years, they have comprehensive benchmark revisions. Basically someone comes up with a brilliant idea to manipulate the GDP formulas and then they go back and (I think) revise them ALL (back decades as far as the data was recorded). So, if you consider these, they never will stop adjusting GDP.

Were the stimulus payments really such a good idea? It seems like all they did was give the 2nd quarter GDP an artificial boost, and will only delay the inevitable. Do you think the 3rd quarter GDP will be negative, after the most of the stimulus checks have already been spent?

Tax cuts, rebates, stimulus payments, etc are all artificial unless they are matched with equal cuts in spending. The end result is you get $600 and you get a $600 debt added to your future government taxes.

It is like you going out to the bank and getting a $10k loan for a big purchase. Sure, in 2008 you get to spend $10k more than your salary. Your gross domestic purchasing power went up $10k that year. But you still owe $10k and you aren't actually any better off if you include your debt. Ok, I'll retract that a bit, IF you use your debt for good purposes, you MIGHT be a bit better off, but many people don't borrow money for money making purposes.

If the tax cuts, rebates, etc are matched with spending cuts, then you don't have new debt and the GDP change is actual change. Unfortunately, that means there is extra spending by consumers which matches less spending by the government and there is no effect on GDP (assuming they happen in the same quarter).

Will the government issue a 2nd round of stimulus checks? Maybe the government will just keep sending everyone more free money so the country can spend its way out of this economic slump!

I've heard rumors of a 2nd round. See my comments above. We certainly can artificially pump up this quarter's GDP (by borrowing from later quarter's GDP). But we aren't any better. We screw up our future just to make a number look better. That sounds EXACTLY what many politicians would want. Make them look good and their successor look bad.

I think the last 2 paragraphs are especially important - I see many posts on here claiming that the only criteria for a recession is 2 consecutive quarters of negative GDP, when in fact the NBER uses a variety of measures to classify a recession.

Like you said, the 2 consecutive quarter definition is just one of many commonly used definitions. In fact, the 2 consecutive quarters one is quite new and many economists don't agree with it. It was just used as a simplification for the media, but that caught on like wildfire. Anyone who says it must be 2 consecutive quarters is just ignorant of reality.

 

[Slew Foot]

Hmmm should the GDP be adjusted for governmental deficits?

500 bill is 1/28 of 14 trillion, or about 3.8%. So subtracting that from the GDP means that we've been negative for a long time.

 

[dullard]

Originally posted by: Slew Foot
Hmmm should the GDP be adjusted for governmental deficits?

500 bill is 1/28 of 14 trillion, or about 3.8%. So subtracting that from the GDP means that we've been negative for a long time.

I'd really, really, really would love for them to adjust GDP for governmental deficits. Then we'd finally get a true picture of the economy.

Someone out there probably has that graph already done. I just haven't found it yet. And I'm too lazy to make it.

 

[rchiu]

Originally posted by: dullard

Originally posted by: Slew Foot
Hmmm should the GDP be adjusted for governmental deficits?

500 bill is 1/28 of 14 trillion, or about 3.8%. So subtracting that from the GDP means that we've been negative for a long time.

I'd really, really, really would love for them to adjust GDP for governmental deficits. Then we'd finally get a true picture of the economy.

Someone out there probably has that graph already done. I just haven't found it yet. And I'm too lazy to make it.

GDP = consumption + gross investment + government spending + (exports - imports)

 

[dullard]

Originally posted by: rchiu
GDP = consumption + gross investment + government spending + (exports - imports)

And I would like to see:

Consumption + gross investment + (government spending - government debt) + (exports - imports).

As it is now, the government could suddenly spend billions (soon trillions) more and suddenly GDP grows. But, in my formula, it wouldn't grow because that is a false growth. It would be as if they neglected the imports portion just to make GDP bigger.

 

[miketheidiot]

Originally posted by: dullard

Originally posted by: rchiu
GDP = consumption + gross investment + government spending + (exports - imports)

And I would like to see:

Consumption + gross investment + (government spending - government debt) + (exports - imports).

As it is now, the government could suddenly spend billions (soon trillions) more and suddenly GDP grows. But, in my formula, it wouldn't grow because that is a false growth. It would be as if they neglected the imports portion just to make GDP bigger.

its real growth, there is nothing 'fake' about it.

gdp is ment to measure all goods and services produced with a countries borders, why woudl we not count part of it because it's financed by government debt? should we also detract consumption financed by corporate or personal debt also well, since thats also 'fake'

 

[Mark R]

GDP broken down

 

[Mark R]

Originally posted by: Special K

What number do they use to account for inflation when determining whether or not a given quarter experienced real GDP growth? Is it CPI? Core CPI?

It's actually a different method of calculating GDP.

Calculating 'nominal' GDP is done by basically summing all the individual dollar cost components.

The inflation adjusted figures, 'real' GDP is calculated in 'chained dollars'. Essentially, a reference year is chosen (e.g. 2000) and the total dollar value for each component measured in GDP is calculated. The for subsequent years, the total *quantitiy* (not value) for each component is measured. Each component is then priced up at the reference price.

A fictional example might be: 1 million tonnes of beef were produced in 2000, at an average price of $1000 per tonne. In 2007, 1.1 million tonnes were produced at an average price of $2000.

The 'real' GDP calculation would calculate the value of beef as $1bn in 2000 and $1.1 bn in 2007.