My Q4 National Income Forecasts Evaluated

The BEA and I agree very closely on the components of nominal national income (they have not calculated corp profits yet). In fact, they see a bit more national income than I did.

It appears that the main disagreement between BEA and I is about the inflation/deflation rate. They see -0.3 and I see -3.3.

Remember my forecasts

I had three real GDP forecasts ranging from -2.2 to +.8 (annual growth rate from Q4). The "experts" consensus was -5.4.

According to market participants at intrade.com, there was only a 10 percent chance that the BEA would report something this morning that was better than -4.0.

This morning we learned that the BEA's "Advance" estimate was -3.8. It will be followed in about a month by its preliminary estimate, and then later its final estimate. I mentioned this morning that they have more work to do on deflators.

I had previously predicted that real GDP "might" go up, although I still said that slightly down was the more likely. I was very precise about that: I said that it was 1/3 likely to go up and 2/3 likely to go down.

There are no rules in the blogosphere, but it is factually incorrect to quote me as predicting that real GDP WILL go up. "WILL" and "MIGHT" are different in plain English (not to mention that I also put it terms of probabilities).

$120 per person

The BEA says that real GDP fell $120 per person in Q4.

Even if we attribute all of that drop to the banking crisis, that means the crisis' damage was $120 per person.

Yet, in the same quarter, Congress dedicated $2300 per person to bailing out banks. Looks like we got ripped off.

I am suspicious about the Investment deflator

This morning the BEA said that price of investment goods went up in Q4. This was especially true for nonresidential structures (7.4% annual inflation rate) and for equipment (3.4% annual inflation rate).

Their equipment inflation estimate may hold up -- the PPI for capital equipment went up every month of Q4.

I am dubious about the structures inflation. The PPI for construction went down every month this quarter. I would think that residential and nonresidential construction prices would move together. Fixing that could turn today's estimate of -3.8% per year GDP growth (for the quarter) into a revised -3.5%.

Wow I was close on Nominal GDP

Wow, in dollar terms, I was close on each of the spending categories (see below)!

I expected the GDP deflator to fall a lot more, and the experts thought it would rise. I wonder how much GDP deflator revision is possible.

Flashback: Q4 GDP deflators

The BEA released their deflators today:

GDP deflator: -0.3 percent (I had predicted -3.3 percent)

PCE deflator: -5.7 percent (I had predicted -4.6 percent)

GPDI deflator: +0.5 percent (I had predicted -0.8 percent)

My nominal GDP prediction was close -- it's just that I saw the GDP deflator falling more. The experts saw the GDP deflator going up.

Productivity Surges in Q4

From 2008 Q3 to 2008Q4, aggregate labor hours fell 7.4% (at an annual rate).

The BEA reported today that aggregate real GDP (that is, aggregate spending) fell only 3.8%.

That means:

1. Productivity grew 3.6%, and


2. We have to continue to question the common "wisdom" that spending drops are causing the employment drops. I tend to think that causes are bigger than effects: its the employment drop that causes the spending drop.

Flashback: GDP will not fall below $11 trillion

I promised that real GDP would not fall below $11 trillion (year 2000 chained). That is where real GDP was at the peak of the housing boom. If we stay above that floor, real GDP is doing better than the 1981-82 recession.

As you can see below, this morning's release of 2008 Q4 does not bring the $11 trillion mark much closer.

Fed Takes More Steps to Reduce Employment

I saw a report today that the Federal Reserve is taking still more steps to modify mortgages, and thereby reduce homeowners' incentive to work.

2008’s New Economic Highs Deeply Disappoint

Copyright, The New York Times Company

When measured in terms of terms of financial gyrations and national employment, 2008 was an absolutely terrible year. When measured in terms of production, the U.S. economy in 2008 was the best in its history.

This week the Bureau of Economic Analysis will release its first estimate of Gross Domestic Product (G.D.P.) for the fourth quarter of 2008. G.D.P. measures the total amount produced and spent in the nation during a particular time frame, such as a year or a quarter-year. Some say that G.D.P. “is the best barometer of the country’s economic fitness.”

The first column of the table below shows GDP for the four quarters of 2007. 2007 United States G.D.P. was about $3,500 billion dollars for the United States in each quarter, for an annual total of $13,807 billion dollars. To put that more personal terms, the last rows of the table divide by the total population: 2007 G.D.P. was $45,776 per person.

One reason that more dollars can be spent in one year as compared to the previous year is that a dollar is worth less over time, but that by itself does not help American living standards. In order to compare 2008’s results to 2007’s in a way that is informative about living standards, most economists (including those at the B.E.A.) refer to real G.D.P.: dollar G.D.P. adjusted the effect of inflation.

The second column of the table therefore reports real G.D.P. for each quarter of 2008, measured using 2007 prices. That is, production for 2008 is measured using the items actually produced in 2008, but values each item at its 2007 price.

In each of the first three quarters of 2008, more was produced in our economy than was produced in the same quarter a year before. For example, G.D.P. in the third quarter (the months of July, August, and September) of 2008 was $26 billion more than in the same quarter of 2007.

We do not yet know what the B.E.A. will measure for the final quarter of 2008. Pundits such as the economic teams at Goldman Sachs or the Bush White House say that the growth rate of real G.D.P. from the third to fourth quarters will be about -5 percent per year, which means that they expect real G.D.P. for the fourth quarter will be 1.25 percent lower than it was in the third quarter: about $3,465 billion.

My estimates (detailed here) suggest that the B.E.A. will report fourth quarter real G.D.P. to be $3,503 billion – or about the same as in the third quarter. Despite our disagreement about Q4, the pundits and I agree that the annual total for 2008 will be about $14,000 billion, or very close to $46,000 per person. With real production of $46,000 per person, the “recession year” of 2008 produced more goods and services than did 2007, or any other year in U.S. history.

I have not seen any explanation of how the U.S. economy can reach new production highs at the same time that jobs disappear and its financial system is in chaos. But – given that the disease has such strange symptoms – I have to wonder whether the usual remedies are still appropriate.