Tuesday, April 25, 2017

Private Sector Resilient in U.S. Economy

The Bureau of Economic Analysis has released fourth-quarter GDP numbers for the U.S. economy. It is the first of three important sets of GDP data from the BEA; the next big number is the advance estimate of GDP growth for the first quarter of 2017, which we can expect on Friday. Then on May 11 the BEA releases fourth-quarter GDP data for the states. That release is going to be very important for the reassessment of our state's dire straits. 

Best of all: the May 11 release coincides with the Revenue Committee meeting in Saratoga on May 11-12. 

As a lead-up to that date, let us first, here and now, review the latest GDP data for the U.S. economy. These are value-added numbers, telling us what industries add most economic value to the economy.* It gives us an overview of our industrial "landscape" and what industries are strong and weak. 

The most important message in these value-added data is the resiliency of the private sector. Measured in current prices, since 2006 the total private sector has grown by 3.25 percent per year. Total government - federal, state and local - has "only" grown by three percent.

It is hardly surprising that services industries have experienced strong growth. At 3.64 percent per year, private services added $3.7 trillion more to the economy in 2016 than in 2006. That represents a 40-percent increase in the contribution of economic value from services. 

By comparison, the goods-producing sector looks almost stagnant. With 2.2 percent annual growth, goods producers have increased their contribution of value to the economy by 16.5 percent in ten years. While these numbers are weak, they are not outright depressing. Manufacturing remains the third largest industry in the U.S. economy, being responsible for 11.6 percent of total economic value. This number has been slowly declining over the past ten years, but it is still respectable, and probably higher than many people would imagine.

Growth-wise, again, here are the industries in the U.S. economy, by major category, with their average current-price growth rate 2006-2016:

Table 1
Avg growth
  Educational services, health care, and social assistance 4.72%
  Professional and business services 4.43%
  Arts, entertainment, recreation, accommodation, and food services 4.15%
  Mining 3.94%
  Transportation and warehousing 3.85%
  Wholesale trade 3.48%
  Finance, insurance, real estate, rental, and leasing 3.45%
  Utilities 3.44%
  Information 3.06%
  Agriculture, forestry, fishing, and hunting 2.92%
  Other services, except government 2.78%
  Retail trade 2.31%
  Manufacturing 2.31%
  Construction 1.94%
Source: Bureau of Economic Analysis

The growth in education, health care and social assistance breaks down as follows:
  • Educational services, 5.05 percent
  • Health care and social assistance, 4.68 percent
It is worth noting that health care is the only private industry that has a sustained growth record here in Wyoming. We will see more of its performance on May 11.

Manufacturing and mining are two industries that are often mentioned in media with reference to economic growth. Here are their growth track records since 2006:

Figure 1
Source: Bureau of Economic Analysis

Note the green function representing mining: the last three peaks in early 2008, in 2011 and in 2013-14, have gradually become weaker. Note also that the decline in mining activity in 2015 was a tad deeper than it was in 2009. Granted, back then mining came off an almost 40-percent growth peak, so the total fall in mining activity was actually quite bad. That said, though, in the past six years mining has not been able to return to anything that comes close to the heights of yore. 

Manufacturing, unfortunately, has shown weakness in the past year or so.It remains to be seen where the production of durable and non-durable goods will go under Trump; for now, it maintains its position in the economy in general.

These GDP numbers will provide an important background for the state-level GDP data that the BEA releases on May 11. It will also help us understand the first-quarter GDP numbers for the U.S. economy that we will be able to discuss on Friday. 

Until then, enjoy the weather while it lasts. After all, what would a Wyoming spring be without a couple of snow storms?
*) For those of you who are not macroeconomic nerds (I hope you have better things to do with your lives than to read national accounts data for fun...), there are three ways to tally up our GDP. The first method is called the "income" method and adds up everything we make based on work and property (defined in the broadest possible sense). The second method measures "spending" and is probably the most commonly referred-to in media. It categorizes spending into private consumption, gross fixed capital formation (business investments) and government spending. At the end we add the net between exports and imports. The third method, "value added", keeps track of how much a product is improved through every stage of production. That added value is then tallied up at the final production stage. All these three methods must, by definition, add up to the exact same number.

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