We’re Still #1 (Unfortunately)

The Bureau of Economic Analysis rewrote history on Friday. Along with GDP data for the second quarter, BEA also published revisions to its GDP estimates since the start of 2007.

Bottom line: The recession was worse than originally thought. The economy contracted by 4.1% from peak to trough (Q2 2008 to Q2 2009), up from the 3.9% previously estimated.

The Great Recession has thus solidified its position as the worst downturn since World War II:

As painful as it has been, the recession remains a far cry from the Great Depression, when economic activity plummeted almost 27%:

Which raises an important question: Just how close did the Great Recession get to being the Great Depression 2.0?

Mark Zandi and Alan Blinder took a crack at that question in a paper released last week.  Their answer: If it weren’t for aggressive monetary and fiscal policy responses, the U.S. economy would have contracted more than 12% during 2008, 2009, and 2010 — about half a Great Depression (and arithmetically, but not economically, comparable to the demobilization after WW II).

A Silver Lining in Second Quarter GDP?

Last Friday the Bureau of Economic Analysis released its first look at GDP growth in the second quarter. BEA estimates that the economy grew at a moderate 2.4% annual pace in the quarter, notably slower than the 3.7% pace in the first quarter and the 5.0% pace in the fourth quarter of 2009 (both those figures were revised in this release).

As usual, I think it’s helpful to break down economic growth into its key components. The following chart illustrates how much various types of economic activity contributed to (or subtracted from) second quarter growth:

The chart illustrates the silver lining in an otherwise tepid GDP report: every major category of domestic demand expanded in the second quarter. Consumers, businesses, export markets, and governments all increased their purchases. That’s a good sign. Indeed, you have to go back more than five years, to the first quarter of 2005, for the last time that happened.

Investment showed particular strength. Business investment in equipment and software (E&S) grew at a 22% pace, thus adding about 1.4 percentage points to overall GDP growth. Boosted by the end (hopefully permanent) of the new homebuyer tax credit, housing investment grew at a bubble-like 28% pace (adding about 0.6 percentage points to GDP). And business investment in new structures recorded its first gain in two years

Despite solid growth in disposable incomes–up 4.4% adjusted for inflation–consumer spending grew at only a 1.6% pace.  As a result, the saving rate increased to 6.2%, compared with 5.5% in the first quarter.

And then there are imports. As I’ve discussed before, BEA calculates GDP by adding up all the components of demand for U.S. products–consumers, businesses, governments, and export markets–and then subtracting the portion of that demand that is supplied by imports. That means that any growth in imports appears as though it subtracts from overall economic growth.

That’s what happened in the second quarter. Imports grew at a brisk 29% pace, thus subtracting (using BEA’s accounting approach) 4.0 percentage points from overall growth. Which is why all those blue bars in the graph net out to only 2.4% growth in GDP.

I should hasten to add that this does not actually mean that imports are bad for growth. The big red bar is an accounting convention, not a measure of economic impact. Indeed, many imports are essential to our economy, at least in the foreseeable future (think oil for transportation and coffee for Starbucks).

I should also note that BEA’s calculation of contributions to GDP growth, which I graphed above, is subject to the same criticism that I’ve leveled at the claim that consumer spending is 70% of the economy. In a perfect world, an appropriate share of the imports (the red bar) would be netted against each of the components of demand (the blue bars). The result would be a graph of contributions that would truly illustrate how much each category of demand actually contributed to U.S. GDP growth. I will take a crack at that in the future.

Consumer Spending is 60% of the Economy, not 70%

Early Friday, the Bureau of Economic Analysis released its third look at economic growth in the first quarter. The results were disappointing: BEA now estimates that Q1 growth was only 2.7%, down from the prior estimate of 3.0%. A key reason: consumer spending was weaker than previously thought.

As I noted in May, the monthly release of GDP data is inevitably followed by commentators claiming that “consumer spending makes up 70% of the U.S. economy” (see, for example, here). Unfortunately, that isn’t right. Consumer spending appears to be about 70% of the economy based on a seemingly obvious calculation (consumer spending divided by GDP), but that ignores the way that macroeconomic accounting handles imports. For reasons detailed in my earlier post, careful analysis suggests that the actual ratio is about 60%.

One reason the 70% error is so common is that doing the correct calculation requires a great deal of work; for example, you need to estimate the fraction of consumer purchases that come from imports. If we want commentators to start using the right figure, we need an easier way to get the idea across using the information reported in the headline GDP release.

Here’s one idea: Compare consumer spending to a measure of overall demand. To do so, we start with the usual macroeconomic identity:

GDP = C + I + G + X – M,

which says that GDP equals Consumer spending, Investment, Government spending, and eXports minus iMports (which are subtracted to avoid double-counting). Looking at this identity, you see that C, I, G, and X can be viewed as measures of demand from consumers, businesses, governments, and overseas markets, while M is a measure of supply from overseas producers.

To get a more reasonable measure of the importance of consumer spending, we can calculate what share of “overall demand” (C + I + G + X) comes from consumers. As shown in the chart, that measure (in red) has been roughly 60% for decades. The usual, misleading measure of consumer spending’s importance (in blue), however, has been up around 70% over the past decade, but used to be lower back when imports were smaller.

The C / (C + I + G + X) measure of consumer spending’s importance is hardly exact. For example, it doesn’t consider how much consumer spending actually comes from imports. However, it’s the simplest measure I could think of that comes close to the right answer. But maybe readers have an even better idea?

P.S. Thanks to Cornelia Strawser for helpful discussion of this measurement challenge.

Consumer Spending is Not 70% of the Economy

Journalists, commentators, and economists often say that consumer spending makes up 70% of the U.S. economy. Indeed, it’s easy to find several examples of that claim in today’s coverage of the latest GDP data (e.g., here). And, full confession, I’ve used that phrase a few times myself.

There’s just one problem with the 70% claim: it’s wrong. Consumer spending actually makes up only 60% of the economy.

This discrepancy exists because national income accounting doesn’t always mix well with simple arithmetic. If you look at data for 2009, you will find that consumer spending totaled $10.1 trillion, while GDP was $14.3 trillion, both measured in current dollars. Put those together, and it appears that consumer spending is about 71% of the economy (= 10.1 / 14.3). (You get almost the exact same percentage if you do the calculation with real values, but that introduces other complexities.)

That calculation is so simple, it’s easy to understand why it has a fan club. But there’s a hidden problem. To see it, it helps to do the same calculation for other parts of the economy. Again using current dollar figures for 2009, you will find the following:

     Consumer Spending            71%
     Investment                            12%
     Government                          21%
     Exports                                    11%

Notice anything strange? If you add these four sectors of the economy together, you discover that they account for 114% of GDP. In other words, consumer spending, investment, government spending, and exports, when combined, are one-seventh larger than the total economy.

This apparent paradox—the components of the economy are bigger than the economy itself—is resolved when you consider how the economic data handle imports. In order to determine gross domestic production, the statisticians add up domestic purchases and then subtract imports. So the full national income accounts for 2009 show the following shares of the economy:

     Consumer Spending           71%
     Investment                            12%
     Government                          21%
     Exports                                    11%
     Imports                                 -14%

These figures add to 100%, as they should. They also demonstrate why consumer spending was not really 71% of the U.S. economy in 2009. Total consumer spending was indeed 71% of the size of the economy, but part of that spending went to imported goods (clothes, coffee, cars, etc.). If you want to know how much consumers contributed to U.S. GDP, you need to take the 71% figure and then deduct the portion that was spent on imports.

I am not aware of a simple way to do this calculation using the data in the regular GDP reports. Over at Mandel on Innovation and Growth, however, Michael Mandel provides a useful discussion of a paper that does this calculation for several recent years, including 2008. (Michael deserves credit for taking a leading role in fighting back against the claim that consumers are 70% of the economy.)

The paper, “Induced Consumption: Its Impact on Gross Domestic Product (GDP) and Employment” by Carl Chentrens and Art Andreassen (you can find it in this conference proceeding) makes exactly the import adjustment I described above. For 2008, it concludes that the relative shares are as follows

                                        Unadjusted                   Adjusted

Consumer Spending           71%                           61%
Investment                            14%                           11%
Government                         20%                           17%
Exports                                   12%                            11%
Imports                                 -17%

The authors find similar results in previous years, including 1999, 2002, and 2006.

Bottom line: Consumer spending really makes up about 60% of the U.S. economy. But you’d be hard-pressed to know that from the usual GDP data.

Note: The authors make a second adjustment for “induced activity”, that Michael Mandel also picks up on. That makes the consumer share seem even smaller. I have serious reservations about that adjustment, however, particularly when trying to answer questions about (a) the overall size and composition of the economy and (b) its long-term growth. Thus, I favor the 60% figure.

Rail Traffic Up in March

The Association of American Railroads publishes an excellent monthly compendium of economic data called Rail Time Indicators. I’ve been meaning to mention it for months.

The latest edition reports another sign of economic recovery: March freight rail traffic recorded its first year-over-year gain in almost two years:

A second chart shows just how much freight activity declined in the fall of 2008 and how far it still has to go to recover (watch out for the truncated y-axis, though):

The report slices and dices these data in all sorts of interesting ways, e.g., by product (coal, chemicals, etc.). Highly recommended for macro data lovers.

P.S. Calculated Risk provides further excerpts on the report.

Inventories Still the Growth Story in Q4

The Bureau of Economic Analysis has released its third look at the economy in the fourth quarter of 2009. The economy grew rapidly in the quarter, but slightly less than previously reported: the new estimate is a 5.6% pace of real GDP growth vs. 5.9% in the prior estimate.

As usual, I think the best way to understand this report is to see what sectors contributed the most or least to reported growth:

Almost two-thirds of the growth reflects businesses restocking their shelves and warehouses slowing the rate at which they were working down inventories; the change in inventory investment accounted for 3.8 percentage points of the overall 5.9% of growth. (Updated: 3/31/10)

Consumer spending grew at a modest 1.6% pace and thus added 1.2 percentage points to overall growth (consumer spending accounts for about 70% of the economy and 70% x 1.6% = 1.2%, allowing for some rounding). That’s down from the previous quarter, when cash-for-clunkers boosted car purchases. Housing investment also slowed, again in the wake of earlier efforts–the tax credit for new home buyers–that had boosted growth in the third quarter.

Business investment in equipment and software showed signs of life, growing at a healthy 19% pace. That added 1.1 percentage points to growth, more than half of which was offset by the ongoing decline in non-residential construction.

Government spending fell slightly during the quarter. Stimulus efforts boosted non-defense spending by the federal government, but that increase was more than offset by a decline in defense spending and in state and local spending.

Google’s Public Data: Much Improved

Google recently released some major improvements in its public data efforts. If you click on over to Public Data, you will find a much broader range of data sets including economic information from the OECD and World Bank, key economic statistics for the United States, and some education statistics for California. Google has also included more tools for visualizing these data, from standard line charts to the evolving bubble charts that have made Hans Rosling such a hit at TED.

As an example, I made a flash chart of state unemployment rates from 1990 to the present. Puerto Rico (which counts as a state for these purposes), Michigan, Nevada, and Rhode Island currently have the highest unemployment rates, so I thought it would be interesting to see how they stacked up against the other states over the past twenty years.

WordPress doesn’t allow me to embed Flash, but if you click on the image above and then click play, you will see the evolution of state unemployment rates over time. (Spoiler alert: All those colored bars move sharply upward toward the end of the “movie”.)

Long-time readers may recall my series of posts criticizing Google for directing its users to unemployment data that have not been seasonally adjusted. Happily, Google now allows the user to use either seasonally adjusted or non adjusted data. Two cheers for Google.

Why only two cheers rather than three? Because Google still directs unsuspecting users to unadjusted data–without the ability to switch to seasonally adjusted–if they do a Google search on “unemployment rate United States“. That’s a big deal, particularly for February 2010 when the official unemployment rate was 9.7%, but the unadjusted figure reported by Google was 10.4%.

Clearly, the two parts of Public Data need to integrate a bit more.

Sharp Drop in Underemployment

The most encouraging item in todays jobs report was the sharp drop in underemployment (which includes not only those who are unemployed but also marginally attached workers and those who are part time for economic reasons). The underemployment rate fell to 16.5%, down from its peak of 17.4% last October and from 17.3% in December:

The headline unemployment rate also declined; it now stands at 9.7%, down from its 10.1% peak in October and from 10.0% in December.

These declines are encouraging, but the labor market obviously has a long way to go. Just how far was reinforced by BLS’s updated figures on the number of payroll jobs. Total job losses now stand at 8.4 million since the recession began at the end of 2007.

Fewer Layoffs, Not Enough Hiring

(This is a slightly edited version of a piece that appeared yesterday over at e21.)

As policymakers ponder whether and how they might be able to do more to encourage job creation, they should keep in mind that the monthly payroll job figures [e.g., -85,000 in December] are the net result of literally millions of hiring and firing decisions each month. In addition to the well-known payroll data, the Bureau of Labor Statistics also provides information about the monthly pace of hiring, firing, etc. Those data, known as the Job Openings and Labor Turnover Survey or JOLTS, allow us to track the overall dynamism of U.S. labor markets and the relative balance of gross job gains and losses.

As shown in the following chart, the total number of new hires each month tracks fairly closely over time with the number of people who separate (either voluntarily or involuntarily) from their jobs:

As you would expect, new hires were higher than separations in the middle of the decade when employment was growing. Since the start of the recession, however, separations have outstripped hires by a wide margin.

As the chart shows, overall labor market activity has plummeted over the past two years. New hiring has fallen by more than 1 million workers per month. Employers hired more than 5 million new workers each month back in 2007, but have recently been hiring only slightly more than 4 million. Separations show a similar pattern, as about 1 million fewer workers are leaving their jobs each month than did before the recession.

The decline in separations may seem surprising at first, but is easily understood when separations are divided into layoffs and discharges (i.e., involuntary separations) and quits (i.e., voluntary separations):

As you would expect, layoffs and discharges increased sharply during the recession. During the depths of the financial crisis in late 2008 and early 2009, an average of more than 2.5 million workers lost their jobs each month. The pace of layoffs has since slowed—about 2.1 million workers lost their jobs in November—but remains above levels consistent with growing employment.

Quits, meanwhile, have fallen off a cliff. An average of 1.8 million workers left their jobs voluntarily each month during 2009, about 40 percent lower than the 3.0 million pace a few years ago. In short, many fewer workers are finding opportunities to move to better jobs.

The JOLTS data suggest that the pace of quits may be one of the best signs of a healthy labor market. The uptick in November—to the highest level in ten months—is thus welcome and something to keep an eye on in coming months.