Tuesday, September 2, 2008

Fundamentally Sound?

In the Times, a useful reminder from Louis Uchitelle of the inadequacy of Gross Domestic Product as a proxy for economic well-being. He writes:
While the G.D.P. has continued to rise, wages have stagnated, pensions have shrunk or disappeared and income inequality has increased. Other shortcomings have become apparent. The boom in prison construction, for example, has added greatly to the G.D.P., but the damage from the crimes that made the prisons necessary is not subtracted. Neither is environmental damage nor depleted forests, although lumbering shows up in government statistics as value added. So does health care, which is measured by the money spent, not by improvements in people’s health. Obesity is on the rise in America, undermining health, but that is not subtracted.
Those are some of the bigger issues, but last week's upward revision of the second-quarter growth rate up to 3.3% (from 1.9%) illustrated the disconnect that sometimes exists between economic statistics and perceptions in the short run.

At Econbrowser, Menzie Chinn looked into the numbers, asking "why does it feel like recession?" As he notes, much of the growth is coming from net exports (i.e., NX in the equation GDP = C + I + G + NX); with both increasing exports and decreasing imports. That is, in part, the declining dollar at work... the price deflator for exports rose at a 10.9% rate, and import prices were rising at a 28.5% pace (!!; the second quarter included a big run-up in oil prices, which has since partly reversed...). Hence a divergence between inflation for gross domestic purchases (C+I+G), at 4.2% and overall (GDP deflator) inflation of 1.2%.

The news on output growth was too good to be credible for some - the conspiracy theories appear to focus on the deflator calculations. Devotees of Okun's law will note that a 3.3% real GDP growth rate does not appear consistent with unemployment rising from 5.1% to 5.5% during the quarter.

Update (9/3): Macroblog on the deflator issue.

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