Gongol.com Archives: July 2022
To an unusual level of attention, the Bureau of Economic Analysis released the estimate of second-quarter growth in US gross domestic product. And the estimate reported not growth, but shrinkage -- at an annualized rate of 0.9%. The attention to the release was heightened because the previous quarter also showed a negative growth rate, and the usual definition of a recession is two consecutive quarters of economic contraction. ■ Anyone who allows their opinion of matters to be swayed too much by a preliminary estimate of GDP growth risks drawing faulty conclusions. The BEA typically produces a preliminary estimate and at least two subsequent revisions: The preliminary estimate for the first quarter was -1.4% when it was issued on April 28th, -1.5% upon the second estimate on May 26th, and -1.6% upon the third estimate released on June 30th. Sometimes the swings from an estimate to a final figure are larger than that. ■ There is no need to assume anything nefarious is going on; a GDP estimate is just that -- an estimate. And it starts with incomplete data, which becomes more refined and accurate with time. Gross domestic product is a big-picture value, an imperfect approximation of the total amount of work being done within an economy for a particular period of time. It tends to be inflated into much more than that, since it may be the only economic "score" the median voter can recognize other than the unemployment rate and a stock market index or two. ■ Gross domestic product doesn't tell us much about the underlying factors that determine where it will head in the future. The last quarter's GDP growth rate isn't much of a predictor for the next, but underlying fundamentals, like increasing or decreasing private-sector productivity or monthly changes in local unemployment rates can say a lot. It's akin to the speed of a car: How fast you're going down a highway right now doesn't tell as much about how fast you will be going a minute from now, but whether you're stepping on the brake or hitting the gas says much more. ■ Nobody should get into the habit of obsessing over a single economic variable, even if it is widely reported and (as is the case with GDP growth) points toward whether something important (the total size of the economy) is heading in the right direction. That doesn't mean an economic contraction isn't a big deal, nor that politicians ought to play games with economic definitions. ■ Presidents get too much credit for good economic conditions and too much blame for bad ones; the US economy -- which is about a quarter of the world's total -- is too big to attribute to one person or one set of policies. (Though a case could be made that the Federal Reserve is far more influential than any administration.) ■ But in the end, the US economy represents the aggregate outcome of trillions of discrete choices made by 333 million individuals. Its direction matters, to be sure. But not so much that we should imbue it with a quasi-religious quality. What we should really watch is how the fundamentals drive those aggregate outcomes in one direction or another.