There was a bit of joy in this week’s advance estimate of U.S. Q3 GDP both for traditionalists who focus on the real value of output (RGDP) and for the growing number of economists who track the nominal value (NGDP).
Real output was reported to have grown by 2.5 percent in the quarter, a bit stronger than analysts’ expectations. That was up significantly from 1.3 percent in Q2. RGDP passed a key psychological threshold as it edged above its previous peak, which it had reached all the way back in Q4 2007. After almost two years of recession and two years of slow recovery, the economy has finally entered its expansion phase.
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According to standard business cycle terminology, a recession is the period of decreasing RGDP from the cyclical peak to the subsequent trough. The recovery is the period of growth until output again reaches its previous peak, after which further increases mark an expansion. I am not sure if there is an official definition of double-dip recession, but I would use the term to mean a new recession that begins before the recovery is complete. Using that definition, even if the economy were to turn downward in Q4, we would not be in a dreaded double-dip.
The increase in RGDP was not even. Consumption led the way, helped by services, including, of course, the ever-robust category of medical services. Exports were strong as they have been all year. Imports grew, too, however, with the result that the contribution of net exports to RGDP growth was down just a little. Government contributed nothing. Growth of federal defense spending was exactly offset by decreases in federal nondefense, state, and local government spending. Investment was so-so, contributing 0.52 percentage points to total RGDP growth, not bad, but down a little from Q2.
NGDP watchers should be gratified by a sturdy 5 percent annualized growth rate in the advance Q3 report. The NGDP number was split evenly between 2.5 percent inflation (as measured by the GDP deflator) and 2.5 percent real growth. Proponents of NGDP targeting often use 4 to 5 percent as a reasonable long-run current-dollar growth rate for the U.S. economy. In recent years, however, a huge gap has opened up between the long-term NGDP trend and actual values. Accordingly, total NGDP growth at or just above the top of the range is a good sign, even if it includes more than the 2 percent rate of price increase that inflation hawks would allow.
Of course, what NGDP aficionados really want is not a 5 percent NGDP outcome for any one quarter, but a commitment from the Fed to pursue such an outcome as a matter of policy. No one imagines that policy makers can hit a target of 4-5 percent exactly on a quarter-by-quarter basis, nor should they try. Rather, what the economy needs is a consistent, transparent policy aiming for steady NGDP growth over time to provide a stable climate for business and consumer expectations. To date, the Fed has not made the hoped-for commitment. Still, it is better to see an outcome that is stronger than the anemic 2 to 4 percent NGDP growth of the preceding four quarters.
Of course, the usual words of caution must be uttered. Advance GDP numbers are notoriously subject to revision. Some observers are already picking the numbers apart and concluding they are too good to be true. Well, if they are, let’s at least savor them until next month, when the second revision comes out.
Don’t Miss Ed Dolan’s “Quantitative Easing: Your Ultimate Cheat Sheet to the Monetary Policy“.