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Friday, April 28, 2017

First Quarter 2017: GDP Growth Still Weak

Today is an exciting day! The first GDP growth numbers are in for 2017. This morning the Bureau of Economic Analysis released an advance estimate of the U.S. economy for the first quarter. Compared to the first quarter of 2016, Gross Domestic Product increased by 1.92 percent, with private consumption reaching a mildly cheerful 2.77 percent.

Neither number is impressive by historic comparison, but they are appropriate in one way: this was the last quarter when the economy was affected by the Obama administration's tax-and-regulate policies. From hereon, it will be President Trump's economy.

Here are the inflation-adjusted growth rates for the main components of GDP; GFCF means "Gross Fixed Capital Formation" or business investments; X means Exports, Z means Imports and G is government spending (not counting cash transfers such as Social Security and welfare checks):



Q1 2017
GDP 1.92%
C 2.77%
GFCF 2.00%
X 3.12%
Z 3.83%
G -0.62%


Before we move on, a crash course in national accounts might be helpful. GDP is measured in three ways: spending, income and value added. By definition they always add up to the exact same number.

A common question about GDP is why it can grow more slowly than so many of its components; the answer is, of course, related to how much of GDP each form of spending accounts for. Private consumption, C, generally accounts for 70 percent of GDP, making it by far the most important form of economic activity.

It is also important to keep in mind that exports and imports affect GDP in opposite directions: exports add to GDP since the goods and services that constitute exports are made here; by contrast, imports deduct from GDP because those products are made abroad. The net of our foreign trade, "net exports", is what is added to (if we have a trade surplus) or subtracted from (with a trade deficit) our Gross Domestic Product.

With all this in mind, let us take a closer look at where the U.S. economy is right now. To begin with, Table 1 provides GDP numbers for the past five quarters - please observe that these are current-price numbers, in other words, including inflation. They do not give us an accurate idea of the growth rates in our economy, but they do tell us how big our economy is. Current-price GDP data is important for many reasons, not the least of which is the assessment of a nation's general market for businesses. It is also an essential tool for estimating the tax base. Percentages are for the spending category's share of GDP as of Q1 2017:

Table 1 - Numbers in billions of dollars

2016 2017
I II III IV I
GDP  18,282  18,450  18,675  18,869  19,007
Personal consumption  12,498  12,693  12,832  13,009  13,096 68.9%
    Goods  4,009  4,085  4,112  4,188  4,216
        Durable goods  1,367  1,390  1,414  1,441  1,435
        Nondurable goods  2,642  2,695  2,698  2,747  2,781
    Services  8,489  8,607  8,720  8,821  8,880
GFCF (Business inv.)  3,037  2,988  3,017  3,101  3,147 16.6%
    Fixed investment  2,995  3,003  3,013  3,049  3,138
        Nonresidential  2,292  2,305  2,314  2,324  2,385
            Structures  486  487  501  501  531
            Equipment  1,066  1,059  1,049  1,054  1,079
            Intellectual property products  740  759  764  769  775
        Residential  702  698  699  725  753
    Change in private inventories  42  (15)  4  52  9
Net exports of goods and services  (507)  (492)  (460)  (545)  (558) -2.9%
    Exports  2,179  2,210  2,276  2,265  2,316
        Goods  1,411  1,437  1,495  1,476  1,520
        Services  768  773  781  789  797
    Imports  2,686  2,702  2,736  2,810  2,875
        Goods  2,186  2,199  2,223  2,295  2,354
        Services  501  503  514  515  520
Government spending  3,254  3,262  3,286  3,304  3,323 17.5%
    Federal  1,234  1,239  1,252  1,253  1,260
        National defense  731  729  736  732  732
        Nondefense  502  510  516  521  528
    State and local  2,021  2,023  2,034  2,051  2,062

Source: Bureau of Economic Analysis

Next, let us put the current state of the economy in a historic perspective. For this we use inflation-adjusted GDP numbers, in this case a so-called chain-priced adjustment based on prices from 2009. It is a method that works well with aggregate data, such as the main components of GDP, but not so well if we were to look at more detailed items, such as consumer spending on groceries and clothes, or business investments in heavy trucks. For those data series, other methods are more appropriate for eliminating inflation.

Table 2 reports the same numbers as in Table 1, but this time adjusted for inflation:

Table 2 - Billions of dollars, 2009 prices

2016 2017
I II III IV I
GDP  16,525  16,583  16,727  16,813  16,842
Personal consumption  11,365  11,485  11,569  11,670  11,680 69.3%
    Goods  3,965  4,033  4,068  4,128  4,129
        Durable goods  1,525  1,561  1,604  1,648  1,638
        Nondurable goods  2,471  2,505  2,503  2,523  2,532
    Services  7,404  7,459  7,509  7,553  7,561
GFCF (Business inv.)  2,842  2,784  2,805  2,868  2,898 17.2%
    Fixed investment  2,787  2,779  2,779  2,799  2,869
        Nonresidential  2,180  2,185  2,193  2,197  2,247
            Structures  435  433  445  443  466
            Equipment  1,052  1,044  1,032  1,037  1,060
            Intellectual property products  697  712  718  720  724
        Residential  601  589  583  596  615
    Change in private inventories  41  (10)  7  50  10
Net exports of goods and services  (566)  (559)  (522)  (605)  (603) -3.6%
    Exports  2,102  2,111  2,162  2,137  2,168
        Goods  1,424  1,430  1,479  1,454  1,483
        Services  677  681  684  684  686
    Imports  2,668  2,670  2,684  2,742  2,770
        Goods  2,194  2,194  2,197  2,255  2,280
        Services  472  473  484  485  488
Government spending  2,913  2,901  2,906  2,908  2,895 17.2%
    Federal  1,119  1,118  1,124  1,121  1,116
        National defense  671  666  669  663  656
        Nondefense  447  451  455  457  458
    State and local  1,793  1,781  1,780  1,785  1,778

Let us now put these numbers in contrast to how our economy has been performing historically. Figure 1 reports real GDP growth, on average, by presidential term, which are counted as starting with the second quarter the year they are sworn in and ending with the first quarter four years later. "Kennedy" stands for what would have been Kennedy's complete first term, had he not been assassinated:

Figure 1 - Real GDP growth, 2009 prices

Source: Bureau of Economic Analysis

It is interesting to note that growth rates above four percent were not entirely unusual back in the 20th century. Truman, Kennedy, Johnson, Reagan 2 and Clinton 2 all averaged more than four percent growth. In fact, between World War II and the new Millennium, there were more presidential terms when GDP growth exceeded four percent than with GDP growth at less than three percent: only Eisenhower 2, Reagan 1 and Bush Sr saw such weak growth. But even then, the economy still performed relatively well compared to what we have seen under the last two presidents. We have not seen a single presidential term with three percent growth since Clinton left office; the three last terms actually hold the weakest growth records since World War II:

Table 3 - Presidential terms by average, real GDP growth


GDP growth
Johnson 5.22%
Truman 5.07%
Reagan 2 4.33%
Kennedy 4.31%
Clinton 2 4.29%
Nixon 3.55%
Carter 3.48%
Clinton 1 3.45%
Eisenhower 1 3.40%
Nixon/Ford 3.11%
Bush Jr 1 2.67%
Reagan 1 2.63%
Bush Sr 2.61%
Eisenhower 2 2.41%
Obama 2 2.06%
Bush Jr 2 1.87%
Obama 1 0.67%

In Obama's second term the economy actually managed to average marginally more than two percent per year. This put us right above the Industrial Poverty threshold, below which an economy is moving backwards in terms of standard of living. Between two and three percent an economy is essentially just maintaining its standard of living; only when we climb above three percent we start getting more prosperous again. The upper boundary of the "maintenance band", namely three percent, will adjust downward when we make appropriate adjustments to the role of government in our economy; with a government that does not redistribute, we could see a net increase in our standard of living already at 2.5 percent annual growth. 

The long-term drift into economic stagnation, which was reinforced by the growth rates for the first quarter of this year, is particularly worrisome because we have seen a clear, thus far unbroken trend of stagnation in Gross Fixed Capital Formation:


Figure 2

Source: Bureau of Economic Analysis

The farther we got into the Obama presidency, the less interested businesses were in investing in the U.S. economy. It remains to be seen if that will change under President Trump. For our country as a whole, it is worrisome when businesses resort to basically just maintaining what they have; for Wyoming, the national trend means we have to fight even harder to do everything right with our economy, because we cannot expect that much activity in the rest of the country to spill over to us.

With all that in mind, at least we seem to have a resilient private sector. Within the confines of an overly tax-heavy, regulations-prone government, our entrepreneurs and households are doing their best to stay afloat. On the regulatory side, President Trump is off to a good start in his first 100 days; if he can get his tax reform plan through Congress he will do even more to help bring back growth to our economy. If, on top of that, he could get serious about the federal government's economically harmful spending habits, we could easily get back to four percent growth.

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