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GDP Catches Up

GDP is 1%. That’s terrible. Our country is dying at 1% GDP.

Donald Trump, Third Debate

One of the great things about debating political points today is that anyone who actually knows what’s going on has no idea where to start. Trump was referring to the real (inflation adjusted) growth in Gross Domestic Product (GDP), which was lagging at the start of the year. But with a new number for the third quarter of 2016 showing a net 3.2% growth you have to wonder – What is this guy talking about?

The short version is that it bounces around all over the place. The long answer takes a lot of graphs. Welcome to Barataria, land of the long answer. Prepare for some hand waving.

The jobs are there!

The jobs are there!

As longtime readers know, the Barataria position since the bottom came in 2010 has been that things are indeed getting better. It may not feel like it at times, but it’s true. Job growth has been decent, if not robust, and everyone has a good reason to be happy.

Well, not everyone, that is. There are still huge pockets of people being left behind as the aggregate average figures highlight an economy which is changing rapidly.

This is something we have to expect as we turn the corner into an economic spring, sadly. In a perfect world, government would be activist enough to smooth out the slow periods by taking advantage of cheaper labor and low interest rates to invest heavily in the infrastructure that will get us out of bad times in style. That never seemed like an option to far too many people as we hunkered down in the longest Depression since 1929.

But are things really getting better?

If you think that the latest GDP announcement is a fluke, or even an attempt to manipulate things ahead of the election, the best way to refute your position is to show how things have been since 2008. Here is the net change in real (inflation adjusted) GDP since the big downturn of 2008, shown in annual change to take out the seasonal effects and simple variation:

Annual change in  inflation adjusted GDP since 2008.  Data from the St Louis Federal Reserve.

Annual change in inflation adjusted GDP since 2008. Data from the St Louis Federal Reserve.

Since the rebound in 2010, we’ve average 2.2% growth. It’s gone from 1% to 3.3%, bouncing up and down just a little. For comparison, the average since 1947 is 3.2%, which is to say the current range barely overlaps “normal”.

Things could be better. They could be worse, too – and were. The glass is indeed half-full.

Look at all this idle capital, er, safe cusion for market fluctuations

Look at all this idle capital, er, safe cushion for market fluctuations

How is this happening? The major change from one quarter to the next comes from inventories, which were dragging down GDP for the last year. Companies have indeed been running leaner than usual, not willing to stockpile too much. Running down inventory has been a major feature of the downward slope in GDP change since early 2015.

This is a statement of confidence more than anything, but possibly not the confidence people think of. It has little to do with the political system and a lot to do with a general belief in general growth around the world. If everything was running well inventories would be stable and every day that goes by would be a good day. Turmoil makes everyone cautious, and in a global economy there is far more to keep track of than there was back when these stats were first kept in 1947.

The good numbers are always buried.

The good numbers are always buried.

That’s why GDP growth simply had to rebound from the recent slide. It’s not that confidence necessarily returned, although it has. Inventory was simple run down too far.

That’s not to say we are out of the woods on this by any measure. One feature of an information based economy is that it is simpler to make everything on demand and to minimize inventory by a large number of methods. There will always be downward pressure on inventory, which is idle money you have to pay to store. This will constantly suppress GDP growth until we really do hit bottom somewhere and the global supply chains are simply too stretched to operate effectively.

That’s right about now. It’s happening just in time for what Barataria has been calling “The Year Everything Changes” for the last three years.

Why is 2017 going to be different? Because effects like these take time to squeeze out of the economy. Here is a graph of the year over year change in inventories over the same time period:

Net change in inventory value, annualized, since 2008.  Data from the St Louis Federal Reserve.

Net change in inventory value, annualized, since 2008. Data from the St Louis Federal Reserve.

As you can see, there was a general collapse when confidence took a dive in 2008. That had to be built back in when inventories were too low, so let’s leave aside the big waves for a moment. Before the 2008 recession inventories usually rose at a pace well over 5%, which is to say faster than the economy. If you want to watch for signs of trouble, that is a good one. Since the big adjustments, around 2012 or so, things have been normalizing into a downward trend towards leaner operations.

This is what changes everything.

Low inventory is good, until it stops the ka-ching.

The little uptick at the end? We may have hit a short-term bottom. Inventories are so low they are effecting sales, the fancy way of saying, “Sorry, we’re out of that item at the present time.”

Ideally, these two graphs would look about the same. They do not for a number of reasons, all of which point to the changes still being digested in our economy. It’s all settling out, if slowly, and setting up for something better.

Is GDP growth weak? It could be better. More to the point, it will be better. Inventories account for a full quarter of GDP, meaning that the second curve is very significant. If it were only at zero, we’d be averaging about 3.1% growth in GDP right now – very close to the postwar average.

How do you build that argument? Usually it starts with a long sigh, but it doesn’t have to. Sometime soon this will all even out and The Year Everything Changes will move forward nicely.

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10 thoughts on “GDP Catches Up

  1. What are your thoughts on Brexit? I don’t know if people in the US have an interest in such matters but if you do, it would be interesting to hear your thoughts.

    • The Pound has taken an incredible beating, which would normally be good for a manufacturing nation. Britain is not. I don’t see this going anywhere good as investment really dries up. The key to me is risk – the UK is full of risk right now, meaning investors will mainly look elsewhere unless there is a premium for them. It will keep hurting for years.

    • GDP would have been a bit different all the way through. That big swing down then up in 2008 would have been a lot smoother, for one. Today it would be higher.
      My guess is that the inventory number should change with GDP overall. When it doesn’t that might mean something, but it doesn’t seem to predict but lag so it’s not all that useful.

  2. Pingback: A New Low | Barataria - The work of Erik Hare

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