Recently, U.S. economic numbers have been disappointing to say the least. The public, including the market is beginning to act nervously and this doesn’t factor in that data could have even been worse. What I am referring to is the second estimate of first quarter Gross Domestic Product (GDP), reported at a 1.8 percent annualized rate.
Now, let me explain; GDP is derived by adding Consumption (C) + Investments (I) + Government Spending (G) + (Net Exports). Any increase/decrease in these factors will drive GDP up or down. However, what the public eye does not see is what gets calculated behind the scenes, specifically, how the GDP Price Deflator factors into the reported GDP reading. Below I have listed the definition of the deflator as listed on investopedia.
What Does GDP Price Deflator Mean?
An economic metric that accounts for inflation by converting output measured at current prices into constant-dollar GDP.
An economic metric that accounts for inflation by converting output measured at current prices into constant-dollar GDP.
A key component of the price deflator is “real” GDP. Real Gross Domestic Product is the measure of the economy’s output adjusted for price changes, whether inflation of deflation.
The Bureau of Economic Analysis (BEA), which is the unit of the Commerce Department that reports GDP, continued to use a 1.9 percent annualized inflation rate to calculate real GDP. However, other branches of the commerce department have posted inflation rates higher than that and the April (end of Q1) Consumer Price Index (CPI), which is reported by the BEA, showed that we had year over year inflation of 3.2 percent.
So if we factor in actual first quarter annualized inflation for 2011, rather than the 1.9 percent used, GDP growth shrinks to an annualized rate of 0.55 percent. Again, it was reported at 1.8 percent.
Hence, the title of this issue.
Also, I’d like to point out some headwinds GDP growth my face in the second half of 2011, especially in regard to the deficit reduction argument. Looking at the calculation posted above, (G) Government Spending is listed as one of the key components making up GDP. If government spending is reduced, then it will become a drag on GDP growth going forward, opposed to the boost it has provided through stimulus programs and various other spending programs the past few years.
Since it has become inherently clear Congress will need to cut the deficit, substantially; granted, some relatively small cuts have recently been agreed upon, but for the most part, this has been argument number one between republicans and democrats. Debates are no longer about "if" but by "how much" the deficit needs to be cut. Talks have really heated up as the government quickly creeps up on yet another debt ceiling (currently $14.3 trillion).
There really is no need for us to get into numbers here; the government spent more in order to help the economy along as the private sector found its footing from a recession. Now the private sector, the (P) in the equation will need to pick up in order to offset a slowdown in government spending, which is one of two key facets of deficit reduction.
The other of course is increased tax receipts. Oh joy!
Your hoping the private sector is recovering as well the government thinks it is analyst,
Mitch Jaworski