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Downward Revision

How are things going?  Without useful data, it’s nearly impossible to make good decisions and adjust accordingly.  The most surprising thing about the decade-long downturn in the US economy is that the bottom line data, real (inflation adjusted) Gross Domestic Product, has been a moving target.  Data has been constantly revised downward for as far back as 2003 through last month.

With the first revision to the second quarter 2011 GDP figure due on Friday, we can only expect the very worst.  But that’s not all there is to this problem. A look back at how far it has all been revised down shows just how bad things have been for the last decade – and how policy makers never saw it happening.

The GDP calculation has always had a certain amount of fudge in it.  It’s not easy to add up the total product of a nation into one big number for starters, and the more the Bureau of Economic Analysis (BEA) explains it the less clear it becomes.  But they do their best and we have to accept that as long as they use the same methods each year we can at least figure that the net change has most of the errors canceled out.

The most recent figures going back to 2001 for year over year net growth in GDP (as a percent)  can be found in one handy graph from the St Louis Fed, as always.  Shaded areas are the official “recessions”:

There are several horizontal lines that you can draw on this graph.  The most obvious is at zero, showing where the economy contracted with net negative changes in 2008-09.  Another line can be drawn around 2%, which is roughly the net population growth of the nation every year – if the economy isn’t growing as fast as the mouths we have to feed, we know that we are slipping.  A third line can be drawn at 3.3%, which is roughly the point where we see net job growth based on a regression of all data since 1946 – a level of growth we only barely touched once (in 2004) during this entire decade.

The net result?  Over the last decade our economy has grown at a net of about 1.6% per year.  That is assuming you accept the relatively low estimates for inflation that the BEA uses, which are rather inexplicable.

Why have all the revisions been solidly down?  A cynic might say that no one pays attention to the revisions, so it is possible to puff up the news cycle with a wildly optimistic number you can correct later.  I have yet to hear the non-cynical, technical case for why the revisions are not only consistently down but down considerably years later.  It’s enough to make anyone a cynic.

Given the Federal budget deficits considerably higher than growth as a percentage of GDP through most of this period, cynics have a lot of reason to not believe anything.

What we do know for sure is that the lack of job growth through the last decade has finally been matched to GDP numbers that clearly show how bad it’s been.  What you may have felt in your guts has finally, years later, been confirmed by the BEA – economic growth has been essentially nonexistent for a decade.

Watch on Friday for the net revision for the second quarter, which initially stood at 1.3% year over year growth.  If that is revised much lower we can expect more panic in the stock market – and revisions have only been down for quite some time.

18 thoughts on “Downward Revision

  1. Erik:

    I looked over the BEA summary of revisions you cited. Most but by no means all are downwards. I don’t have a deep understanding of this stuff, but it makes sense to me that there would be ongoing trueups of the estimates. Are we biasing them high out of denial, then trueing up later? Seems maybe so.

    Clearly, though, the overall US economy is stagnant-to-contracting. And what there still is is being more and more appropriated by the billionaire class. We all know this from what we see and experience.

    Is there any real national discussion of what to do about it? If so, I’m not hearing it. “Jobs” get talked about, but what is happening to actually generate employment? What the real opportunities to do that? What interest does the corporate community actually have in generating employment? In the industries I’ve followed, there is willingness to invest large amounts of capital to *eliminate* jobs. Ie, people in the chemical industry would invest a LOT of money–sometimes millions–to eliminate the need for one operator. Likewise, businesses seem very willing to reorganize their operations to move activities offshore.

    Most smaller and more vulnerable countries seem more upfront in addressing their economic issues as they know they have no choice. In the US, aren’t we really just farting around, thumb up collective ass, waiting for things to rectify themselves? Maybe this is a luxury we no longer have…. Oh well, enough ranting.


  2. You are right that this is all starting to add up but it does beg the question as to where the data was all along.

    Alan, I think you are right that we have not been talking about this at all. There is no reason we should have been happy with the way things were in 2002 to 2007 when it was apparently as good as it could get for a while. I do not understand how we let it slip this far. I think it makes me more sad than angry.

  3. Alan: As you know, I have been trying to get people to focus on both the reality of this situation and the simple fact that there are many things we can try and probably turn it around. People really weren’t paying attention before the debt ceiling debacle – but they may be right now. I think interest is finally peaking – but it is about a decade too late. I think it’s pretty sick that people take so little interest in their collective futures, but that’s the selfish world we live in – selfish to the point where people clearly act against their own interests. Very stupid, if you ask me.

    Anna: I wish I knew where the data was all along. I held off writing this post because I don’t know why the revisions are so heavily downward in any technical sense – but with Friday’s deadline approaching I decided that the difficulty in finding a good answer was a story itself.

  4. I don’t think it’s cynical to say that they are hiding how bad it is from the people. Remember the Fed figures that were released after the fact showing trillions more in gifts to big financiers? They didn’t want us to ever know about it but when they were pressed they told us years later. Same with this data.

    No wonder people have not acted. It was by design. I only hope people can see this and get mad about it. Sorry Annalise but sad doesn’t cut it, we have a revolution to start.

  5. Unbelievable. To think that in 2004 everyone was focused on the Iraq War and not the economy shows how the powerful set the agenda. It was not obvious then how bad things would get but it certainly was not good based on this information. But we didn’t even have it then.

  6. Dale: Interesting point. It was one Hell of a diversion, wasn’t it? George Orwell has to be weeping somewhere.

    But we were always at war with Eurasia, er, Iraq.

  7. When I was an undergraduate in 1980s at Washington University in St. Louis one of my professors, Hyman Minksy, wrote about financial instability in his book, Stabilizing an Unstable Economy (1986). It is relevant today because he spent his career thinking about the Great Depression and, in a sense, predicted the current one. He had told me that the great gap in economics was linking macroeconomics to financial economics and real estate economics. That’s what he tried to do . Steve Fazzari of Washington University presented a talk on Minsky earlier this year.
    Check out the links for more info. http://wc.wustl.edu/events/2011/03/event-460
    The powerpoint slide lists a number of current economists who stock is rising in part to the intellectual debt they owe to Hyman Minksy. Hyman was a gruff talking no-nonsense type of guy. I always felt that he didn’t think theories were getting enough attention, partly because he was overshadowed by Murray Wiedenbaum and Doug North, both great economists of different stripes. But Fazzari and others are reawakening attention to Minsky’s idea.

  8. Smithson: Thank you very much, I am honored to have a student of the great Minsky comment on my humble work.

    I also believe that instability is inherent in modern finance. Success always breed both excess and complacency. I have never been a Black-Scholes-Merton fan because as a Chemical Engineer I was heavily trained in fault tolerance, which is to say the analysis of systems at their limits:

    The power-point presentation you linked to is really great because it challenges us to think about the assumptions that we are building into our systems. I think this is critical.

    I also believe that the only possible solution is a reserve that helps to cushion the inevitable failure, a real insurance rather than a hedge built artificially from an equation. But I understand that even this makes failure a little too cheap if done improperly and requires an understanding of the social risks (which need protection) and the personal risks (which must be taken for a free market to work).

    More than anything, Minsky’s connection between macro policy and micro motivation is very compelling. I have made what I call “Connections Analysis” the core of my own approach, looking at neither individual nodes and actions nor the systemic whole, but the connections that make a whole out of parts.

    I’d love to speak with you some more on this topic if you are interested. I feel that my role as a “hobbyist” is to translate great works like Minsky’s into common language so that the lessons can be brought to a wider world. Thanks again for your great contribution – I hope everyone follows the link and sees what a great thinker Minsky was!

  9. about –“What you may have felt in your guts has finally, years later, been confirmed by the BEA – economic growth has been essentially nonexistent for a decade.” -those graphs and percents don’t mean much in terms of personal economic experience.

    I used to feel guilty about being a poor money manager (living check to check, running up the credit card, etc.) until I saw Elizabeth Warren give a power point presentation explaining why I, with my college degree, have a harder time financially than my high school educated parents did. Some of her basic points are summarized in this MJ interview, The Two-Income Trap

    My experience also matches the diagnoses of our economy’s main problem as explained by Ezra Klein It’s the household debt, stupid While my house is still worth more than I owe, my various loan payments leave me little left for other spending.

    And I have one final link to an op- ed which I found a respite from the doom and gloom about the current and predicted state of our economy What’s So Bad About a Slow Economic Recovery? While far from rosy, things aren’t that bad for many of us (though it does conclude on a bit of a low note when our political dysfunction is taken into account.)

  10. Laurie: Good stuff, I’ve just started perusing your links. Thanks!

    The importance of good data is that we’re living in a time when the complex financial system depends very heavily on management. The US Dollar, standard around the world, is nothing more than the “Full faith and credit of the US”. If they don’t have the right data they will reach the wrong conclusions and do the wrong things.

    Better understanding of the lives of ordinary people would be a great help, of course, but we can only expect so much of that. My main criticism of Krugman, for example, is that he has very different friends than I do. That’s where the political process and subsequent policy making comes into play – and we know how broken that’s been. So we’re back to decent data as our best hope for highlighting what’s going on.

    But we clearly don’t have good data in anything like real time. What we do have fuels denial, dysfunction, and laziness. Given that economic cycles are very real – and quite inevitable, thanks Minsky et al – that’s a scary prospect. So what next?

    But I think it’s obvious by now that we’ve lost a solid decade already “farting around” (to use Alan’s phrase). Let’s try not to lose another one. You’ve got some good stuff there highlighting what is really going on.

  11. Pingback: Connections, Revisited | Barataria – The work of Erik Hare

  12. I saw that the revision came in at 1.0% growth in 2nd quarter, down from 1.3%. The revisions usually are down, in this case a lot.

  13. Anna: Not only that, but Initial Claims were revised up and the new data shows we’re back at 412k per week – keep in mind that 430k appears to be complete stagnation. Fears of a “Double Dip” (which I’d call one long Depression, ‘natch) are being realized.

  14. Pingback: A Decade, or so | Barataria – The work of Erik Hare

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