In William Shakespeare’s A Midsummer’s Night Dream, two young men are passionately pursuing the same girl through a magical forest, while another poor friend of the girl is loved by neither. After some comedic chaos, the two “correct” pairs marry at the end and all is good… except for one detail. An astute observer or reader will notice that behind the curtain of these lovebirds is a fairy king who secretly put a love potion in one of the young male’s eyes so he would fall in love with the correct woman. More on this later…
Act I: Set the Stage
GDP numbers released seem to indicate positive growth in the US economy. Whew! After seeing the Stock markets here and abroad taking severe nose-dives and discussions of the Fed possibly changing its mind about raising interest rates, the Bureau of Economic Analysis’ newest news release sent waves of cool air down the sweaty neck of the financial world.
Now, unlike Shakespeare’s play, the probability that there is a secret fairy king who is increasing Personal Consumption Expenditures for the benefit of the GDP is extremely low. Nevertheless, it would be fruitful to pull back the curtain to see behind the GDP stage before jumping to any conclusions.
Act II: What does the number really mean?
Enter center stage: the GDP number. What is it? What does it signify? It is usually just tied up straight to economic growth. The economy is growing again at a rate of 3.7%. Well… not quite.
It is growing at a rate of 3.7% annualized rate. That means that the economy would grow at 3.7% in a year if every quarter were the same as last quarter. That means it is important to contextualize what is occurring this quarter by what happened last quarter.
This puts a very different spin on what we are seeing in terms of GDP. Last quarter, the economy grew by 0.6%. It will take growth of more than 3.7% in the next two quarters if we are going to reach that 3.7% annualized rate for the year. Furthermore, the last time we saw GDP growth similar to what we are seeing today was in Q4 of 2013, which was followed by a negative 0.9% in the first quarter of 2014. Guaranteed, the next two quarters of 2014 were both around 4%, but following that were two more slow quarters: Q4 of 2014, which was 2.1% and Q1 of 2015, which was just discussed.
So now that we have context for the GDP numbers, what should we be looking at?
Act III: The Magnifying Glass
Without a doubt, the components of the GDP number are much more fascinating to look at. For instance, growth may have been pushed by exports, which were up 5.2% this quarter. We have to keep in mind, however, that the precious quarter saw a decline in exports of 6.0%.
The same can be said for other aspects of this number, like Government Consumption Expenditures, which are the highest they’ve been since Q3 2014 at 2.6%. The previous quarter, GCE shrunk by 0.1%, indicating that government spending at the state and local level pushed this quarter’s number quite a bit.
Not as much, however, as the private sector…
Act IV: Relief
The hero of this story seems to be the private sector. Both gross private domestic investment and personal consumption expenditures (how much the private sector invests and spends) had strong numbers in Q2, this on top of strong numbers posted for last quarter. PCE grew 1.8% in Q1 and 3.1% in Q2.
GPDI outshone even the PCE, growing at 8.6% in Q1 and 5.2% in Q2.
Act V: What just happened?
There are moments in every Shakespeare play when one has to sit back and say to oneself: “Okay? What just happened here?” Occasionally, the answer is, “You will never know.”
It is a little more comforting with the GDP number. It is still beneficial, however, now that we are at the end of the story, to have a quick overview of what has happened.
- GDP numbers were strong. A 3.7% GDP is still a good number. So why write a blog post saying what everyone else already knows? Because, it is important to:
- Breakdown the GDP number to its component parts to find out what is actually occurring in the economy. This way we can make sure there are no fairies pouring love potions over our eyes to see a number we all want to see. Without a doubt, PCE and GPDI showed that private sector investments are healthy.
- As with everything, doing the research always pays off. Going deep into just the first couple pages of the BEA’s report yields a tremendous amount of information that it is important to know when evaluating something like the GDP number. Hence, when going forward into Q3 of 2015, we know what we’re looking for so we can have better knowledge of our current and future economic situation.
Thus, as they say, la commedia, è finita…
To read the PDF release of the GDP number straight from the BEA, click here.