About the GDP Number

Back in April I predicted a weak 2nd quarter RGDP number, mostly due to the sequester.  Tomorrow morning we will find out whether I was right.  In any case, I still expect about 2% RGDP growth for 2013, about the same as 2012.  I doubt the fiscal austerity will have a significant impact, due to monetary offset.  Although I certainly concede it might slow growth in Q2.


Morgan Warstler sent me an article that’s much more optimistic about GDP growth than I am, which makes some interesting points.  It’s not really my area of expertise, so I don’t quite know what to make of numbers like tax revenue rising 6% even adjusted for tax rate increases:



Judging by the figures for growth, the U.S. economy is in the doldrums. Labor-market data tell a more positive story.


Payrolls climbed by 202,000 a month on average from January through June, up from 180,000 in the second half of 2012, according to the Labor Department. Such gains are typically linked with gross domestic product growing close to 3 percent, about double what government data may show next week, say economists at UniCredit Group and Deutsche Bank Securities Inc.


“The employment numbers are closer to the true picture,” said Harm Bandholz, chief U.S. economist at UniCredit in New York and the top payroll forecaster in the past two years, according to data compiled by Bloomberg. “I’m confident GDP growth will pick up in the second half and even more in 2014.”


The weight of the evidence also tips the balance toward a more favorable outcome as federal tax receipts rise at the fastest pace in six years, measures of consumer confidence reach the highest levels since at least 2008, and sales of autos and homes and housing rebound. That helps explain why companies from General Electric Co. (GE) to Texas Industries Inc. (TXI) plan to keep investing and hiring.


After adjusting for the increase in rates that took effect this year, employee income-tax withholdings were up about 6 percent in June compared with a year earlier, the best showing for that month since 2007, according to calculations based on Treasury data by Joseph LaVorgna, the New York-based chief U.S. economist at Deutsche Bank. More receipts point to gains in employment, rising wages or a combination of both.


Tax Receipts


“Tax receipts are confirming the improvement in the labor market, but GDP seems to be overstating the weakness in output,” said LaVorgna. GDP in the first half of the year gives the impression of a “lousy” economy whereas it’s actually been “decent,” he said. It “reinforces the view that the second half will be better.”


.  .  .


Growth in the first half of 2013 was restrained by the effect of federal government cutbacks and increase in taxes which is likely to wane. Slower inventory building and a wider trade deficit also curbed the expansion last quarter, when GDP rose at a 1 percent annualized rate, according to the median forecast in a Bloomberg survey ahead of Commerce Department data due on July 31. The economy grew at a 1.8 percent pace in the first quarter.


.  .  .


Expanding job openingshome prices that are growing at the fastest pace since before the recession and record-high equity values are helping shore up household confidence. The Bloomberg Consumer Comfort Index (COMFCOMF) climbed last week to match the highest level since January 2008 as Americans grew more upbeat about the economy. A similar measure from Thomson Reuters/University of Michigan issued today reached a six-year high for July.


More confident consumers are spending on big-ticket items. Cars (SAARTOTL) and light trucks sold in June at the strongest pace since November 2007, according to Ward’s Automotive Group. Ford Motor Co. (F) on July 23 said it will hire 3,000 salaried employees this year, 800 more than originally planned.


Housing Rebound


The housing rebound is another sign of an improving economic outlook.


.  .  .


Annual Revisions


The disconnect between hiring and growth may begin to narrow when, along with second-quarter growth figures, the Commerce Department next week issues GDP revisions, said Neil Dutta, head of U.S. economics at Renaissance Macro Research LLC in New York.


The government annually updates the growth data by incorporating more complete information that is only available with a lag. This year will be a more comprehensive overhaul, something that is done about every five years, and will include changes in the way GDP is calculated, which could potentially affect the figures back to 1929.


GDP “looks increasingly like the outlier” relative to other data such as corporate profits, said Dutta. “Overwhelmingly, the signals are that the economy is not only doing OK, but doing better than a lot of people think.”


A stronger economy would make Federal Reserve projections easier to achieve this year and next, said Dutta. In June, Fed officials forecast the U.S. will grow 2.3 percent to 2.6 percent this year and 3 percent to 3.5 percent in 2014.


Income Gains


Gains in income and profits are another sign that growth is probably stronger than currently thought, according to Joseph Carson, director of global economic research at AllianceBernstein LP in New York.


Fed research has shown that gross domestic income, or the money earned by the people, businesses and government agencies whose purchases go into calculating growth, is a better gauge of the economy. After multiple revisions over time, the growth estimates tend to align more closely with the income figures, rather than the other way around, according to a 2010 paper by Fed economist Jeremy J. Nalewaik.


GDP has increased at a 3.4 percent annualized rate since the third quarter of 2012 before adjusting for inflation, while GDI grew at a 4.9 percent pace, Carson said. He projects the economy’s growth rate will be revised up for the past few years when the update is released on July 31.


Lingering Effects


While the lingering effects of the worst recession in the post-World War II era — including diminished productivity following the plunge in business investment — have contributed to slower growth, “it’s certainly credible that the GDP number has been undercounted,” said James O’Sullivan, chief U.S. economist at High Frequency Economics in Valhalla, New York.


“The employment data are strong enough already to be consistent with at least a 3 percent pace of GDP growth,” he said.



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