The most recent release of quarterly real GDP numbers on November 22nd, 2011 (first revision) suggested that growth during the third quarter was at 2.0% (after the initial estimates were at 2.5%). This means that so far in 2011 real GDP growth has consistently been below the historic trend rate of GDP growth over the last three decades. In the 2011.2 LEIPLINE we reported that the real GDP growth rate was 1.8% for the first quarter initially, concluding that it appeared that growth had slowed from 2010.4. However, we could not be aware at that point just how much growth had slowed. The 2011.1 growth rate originally reported was reduced (with virtually no fanfare or media attention) from 1.8% to 0.4% when the 1.3% growth initial estimates for 2011.2 were released. The second release of the 2011.2 value was lowered from the original estimate of 1.3% to 1.0% growth, but then raised back in November. If the 2011.3 value stays the same or rises, then the growth rate it implies is better than the first two quarters, but Okun’s Law suggests that it takes about 5% annual growth in real GDP to lower unemployment by one percent, so the current growth rate is still far from enough. The November release of the 2011.3 data implied that “The increase in real GDP in the third quarter primarily reflected positive contributions from personal consumption expenditures (PCE), nonresidential fixed investment, exports, and federal government spending that were partly offset by negative contributions from private inventory investment and state and local government spending. Imports, which are a subtraction in the calculation of GDP, increased. The acceleration in real GDP in the third quarter primarily reflected accelerations in PCE and in nonresidential fixed investment, a smaller decrease in state and local government spending, a deceleration in imports, and an acceleration in exports that were partly offset by a larger decrease in private inventory investment.” (bea.gov).
1.16 Real Gross Domestic Product, Chained Dollars Table [pdf]
This quarter we decided to go back to including the BEA table for the components of real GDP (2005 chain-weighted dollars) to show where we are relative to 2007.4 when the recession began. As one can readily see from the bolded categories in the table, 2011.3 was the first quarter whereby the real GDP adjusted for inflation was above what it was in 2007.4. Consequently, although growth resumed in 2009.3, actual real output is only now above what it was in 2007. When you translate this for population growth, however, our standard of living on a per-capita basis has still not returned to 2007.4 levels. This is just part of the reason why it does not feel like the recession is really over. The largest factor inhibiting growth is clearly the lack of investment and most of that is due to the $200 billion decline in residential investment. However, as the red row reveals, there has also been an $80 billion reduction in state and local government spending that has contributed significantly.One of the primary factors allowing growth to return is a decline in net imports (i.e., while imports and exports have both grown, exports have grown by more, so the net effect is advantageous). A $60 billion increase in federal government spending has contributed as well. It is revealing that despite the over $1 trillion dollars of stimulus from the Federal Government, the direct contributions to real GDP are so small. Ultimately, despite a return to growth two years ago, the expansion is simply too slow to make us feel that we are better off. A recent Federal Reserve Bank article suggests that the primary reason why unemployment has failed to recover is not associated with any structural shifts, but simply real GDP growth that is too slow.Last quarter we directed you towards Table A-15 on the BLS website to view more than the standard unemployment rate. Another quarter’s worth of data suggests that the U-3 standard rate fell one tenth to 9.0% and the U-6 broadest rate fell to 16.2% in October after hitting 16.5% in September. These are still double what would be considered full employment and disadvantageous. It is not the most astute of observations, but Americans will not feel like we are truly recovering until unemployment drops considerably. What is necessary at this point is for the private sector to gain the confidence to hire extensively again; and that will not happen until American business entities receive some signals of normalcy from consumers and the federal and state governments that taxes, entitlements, and political turmoil are cleared up.Inflation rates have declined as we are approaching the end of 2011. The 0.1 drop in the inflation rate reflected declining gasoline prices despite oil prices returning to a pattern approaching $100 per barrel. Food price increases also moderated. The continued debt issues throughout the world have dampened growth prospects and price leaders have returned to greater reluctance to attempt price increases across the board. The reader should also be advised that despite all of the fiscal stimuli monetizing the debt, and separate monetary stimuli by the Federal Reserve, the real M2 money supply is not growing as rapidly as historical norms. The largest banks and other financial intermediaries that are receiving loanable funds by selling securities to the FED are simply holding those funds in reserves at the FED. This prevents extensive money growth and consequently mitigated significant inflation.
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