Economic Notes: The Angel is in the Details
5/29/2009
Gross Domestic Product
(GDP) is the broadest measure of goods and services produced by the economy in a given period. Given the importance of GDP data in assessing current conditions and projecting future trends, it is important that they meet two inconsistent goals, specifically being both timely and accurate.
The Bureau of Economic Analysis (BEA) reconciles these objectives by preparing three separate estimates for each quarter’s GDP. Its “advance” (i.e., initial) estimate issues just a few weeks after a quarter closes and that is followed by two revisions (viz., “preliminary” and “final”), each more reliable than the former because the underlying data are more complete and detailed.
The BEA’s second read on the U.S. economy in the first quarter (Q-1) of 2009 indicates that the contraction, while substantial, was less than initially estimated. Real GDP (i.e., GDP adjusted for inflation/deflation) contracted by 5.7% in Q-1, the third consecutive quarterly decline.
Although less than initially calculated (-6.1%), Q-1’s shrinkage was nonetheless substantial and there were some disappointing adjustments. For example, the revised estimate confirmed my earlier comments that the gains in consumer activity were not as robust as initially calculated. In broad terms, the data suggest that the longest downturn in 70 years still has some distance to run.
But even while contracting in Q-1, the economy hinted at its underlying resilience. And this was before the Federal stimulus package was operative.
Since, the consumer accounts for almost 71% of GDP,household incomes will feature prominently in the timing and pace of the turnaround. On that, BEA’s data offers encouragement – although hidden deep in the details of its report.
In Q-1, after having declined for two consecutive quarters, after tax incomes rose. Even though earnings and investment incomes fell, the reductions were more than offset by the automatic stabilizers of reduced income taxes, down at an annualized rate of $200 billion, and increased social welfare payments (e.g., unemployment insurance), up at an annualized $89 billion.
To be sure, there is not much that is cheery in the GDP data for Q-1. Indeed, the oft cited “green shoots” were nowhere to be seen.
Buried in the underbrush, however, are the seeds of an eventual turn around: rising after-tax incomes. It is a seed that will be watered by the stimulus package, mortgage refinancings, and accommodating prices.
To turn a cliché on its head: in economics the angel is in the details.
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