Employment, US Profits, Jack Rabbits, and the Elephant
Quarter 2 Real GDP – Why does the press prefer to look through mud-colored glasses?
The Whack-A-Mole Recovery or Good News is Bad News Until the Good News Really is Good News
Below is a link to one of the key tables from a typical announcement of GDP. The release is a good example of how people write about a country’s economic performance. The table below is pretty old – used for illustration here. Use the following link for the government’s most recent news release:
Table 1 (reproduced below) shows the main AD components of GDP and how they have been performing. Look down the column for 2005. What was the fastest growing sector in 2005?
Bureau of Economic Analysis News Release: 12/21/06: Gross Domestic Product: Third Quarter 2006 (Advance)
|Gross domestic product (GDP).||2.5||3.9||3.2|
|Personal consumption expenditures||2.8||3.9||3.5|
|Gross private domestic investment||3.6||9.8||5.4|
|Equipment and software||2.8||7.3||8.9|
|Change in private inventories||—-||—-||—-|
|Net exports of goods and services||—-||—-||—-|
|Government consumption expenditures
and gross investment
|State and local||0.2||0.5||0.5|
|Final sales of domestic product||2.5||3.5||3.5|
|Gross domestic purchases||2.8||4.4||3.3|
|Final sales to domestic purchasers||2.8||4.0||3.6|
|Gross national product (GNP)||2.7||3.8||3.1|
|Disposable personal income||2.2||3.6||1.2|
|Final sales of domestic product.||4.7||6.5||6.7|
|Gross domestic purchases||5.2||7.6||6.9|
|Final sales to domestic purchasers||5.2||7.2||7.2|
|Disposable personal income||4.2||6.4||4.1|
Working with Data: OECD Forecast and Risk
Below is a link to an example of a good forecast of the U.S. economy in 2004. Look for cause and effect – why is U.S. growth, according to the OECD, going to be faster in 2004 than it was in 2003? What will be the fastest growing AD sectors in 2004? How are policy changes influencing the forecast?
Macroeconomic forecasts are only one part of the information set needed and used my company planners. Some companies will be more impacted by real GDP changes than others. Complete macroeconomic forecasts will include analysis and forecasts of many economic indicators – GDP, inflation, interest rates, exchange rates, and more.
Developments in Individual OECD Countries: United States
http://www.bus.indiana.edu/davidso/corefall04/s6oecdoutlookf04.pdf (taken from the website of the Organization for Economic Cooperation and Development (OECD) www.sourceoecd.org This is one section of their December 2003 Annual Economic Outlook.)
The OECD forecast (above) has a section about risks. The outlook for the U.S. in 2004 was pretty good but they mentioned some risks. GDP growth could be less than their base forecast. So here you are, trying to make some decisions. Let’s say that you are trying to decide about when to implement a new and expensive marketing program to expand sales. Your sales are usually somewhat impacted by real GDP growth. You want to start the program when you are pretty sure that GDP is going to be strong for a while.
|What does the article tell you that you should be looking at – what important economic data should you be focused on to try to decide whether or not to trust the baseline (optimistic) forecast?|
The United States is often viewed as a country with a strong consumer spending component – consumer spending is normally about 65-70% of GDP. That implies that a good bit of U.S. output is directed to households and their needs for goods and services. This has good and bad aspects to it. It is good because the U.S. can rely on its own domestic consumers to keep GDP growing. It is bad because if they spend too much today that means they might be saving too little for the future. Japan and China are considered to be countries that are on the other end of the spectrum. For example, in the early years of the 21st century, U.S. households saved only about 2% of their disposable incomes (income after taxes and government transfers). The rate was zero% in June of 2006 and turned negative toward the end of the year. The Japanese households were saving about 6% in contrast. German and French households saved even more – about 11-12%.
It is interesting that while the Japanese, French, and Germans saved considerably more than Americans, many experts were advocating that they try to save less? Less? Don’t you need to save enough for the future? The question is – just how much does a country need to save? The answer is that it is possible to save too little or too much. The high saving rates of some of these countries translated into too little consumer spending – and too little AD growth – and too little real GDP growth. So while the U.S. might be saving too little for the future, it appears that other nations are saving too much for the present. There is no magic number for how much saving or spending is perfect for all nations at all times.
Another international application relates to exchange rates. Between 2003 and 2006 the U.S. dollar depreciated very significantly against the euro. The result was a healthy increase in U.S. exports and the worry that exports of European nations might weaken. To complicate matters, several Asian countries including China, pegged their currencies to the dollar – that is, they allowed their own currencies to decline against the euro. Why did they do that? Largely because these Asian nations depend very much on exports and did not want to see their currency values appreciate against the dollar. In that way they hoped their exports would remain strong – meaning strong AD and strong GDP growth. The Europeans did not act in the same way. They allowed their currency to appreciate against the dollar and the Asian currencies. They were willing to risk short-run reductions in exports and AD growth. Why? We will have to hold off that answer until we get to the sessions on exchange rates and trade.