In Defence of Tuesday’s GDP Numbers
Jim and I responded somewhat differently to Tuesday’s GDP release. Jim’s Globe and Mail column suggested that it was especially bad: “We’re clearly heading for stagnation at best, and quite possibly another ‘double dip’ downturn.†I perceived a ray or two of hope and told The Toronto Star: “I’m not predicting a double dip.â€
While I think that we actually agree on the important points, the blog can always use some debate. Also, Michael Hlinka could use some instruction on how to disagree with Jim without personal attacks. Let this post serve as an illustrative example.
The Monthly Figures
Some media coverage suggested that Tuesday’s numbers were worse than expected. If so, on what were the expectations based?
Long before Tuesday, we knew that GDP decreased fractionally in April and increased by just 0.1% in May. So, the second quarter was shaping up to be horrible.
Tuesday’s news was that GDP grew by 0.2% in June. While the monthly numbers are not directly comparable to the quarterly figure, June clearly gave the quarter a modest boost.
We should not uncork too much champagne because the quarter was less bad than it could have been. But on Tuesday morning, I was more relieved than disappointed.
An Important Milestone
Jim has dubbed Canada’s economic performance a “non-recovery.†But in the second quarter of 2010, GDP did return to its pre-recession level.
Of course, that recovery is not enough to keep pace with productivity and population growth (especially since Canada’s GDP, adjusted for price changes, was basically flat for a year before the recession started). As a consequence, unemployment remains far above its pre-recession level.
However, the stimulative policies advocated by progressives have propelled a significant recovery over the past year. To me, Tuesday’s numbers underscored the importance of government purchases and investments in getting Canada’s GDP back to even.
Business Investment
Jim’s main point (and the one that got up Hlinka’s nose) is that corporate Canada has failed to invest, despite a strong recovery in profits. I share this concern and posted about it earlier this summer.
But in the second quarter, business investment in machinery and equipment rose appreciably for the first time since the recession (see line 14), even as corporate profits decreased slightly (in seasonally-adjusted terms). Of course, it is too early to tell whether this investment upturn was an aberration or the start of a trend.
In particular, Jim wrote, “Business capital investment is just 6 per cent higher than it was in the trough of the recession a year ago.†I do not know if he was referring to “Business gross fixed capital formation†in total GDP (which includes a lot of residential structures) or “Fixed capital†from the corporate sector account.
Both measures increased by 6% over the past year. For “Fixed capital,†that whole increase occurred in the second quarter of 2010.
We should be deeply concerned about the weakness of business investment compared to the strength of corporate profits. But Tuesday’s figures for the second quarter provided grounds for hope rather than despair.
I think what we are talking here is more of a qualitative change in investment, i.e. similar to a stimulus type activity from government, we need to see a change in the direction and type of investment. Sure plan and equipment rose marginally last period, but it is still anemic and dare I say, lacking in much of a qualitative industrial strategy type qualitative direction.
So I would have to give Jim the nod on this one. Unless we see some outlier type investment activity in some kind of concerted direction- I do not see much help in the GDP numbers- in fact more of the same is what I see.
Sorry one more point- I also want to underline that although we are talking about business investment- we do need to keep the solution space wide open to be inclusive of government spending as well. We need more, and Krugman has been harping on this quite a bit lately.
For example his post today makes note of some historical stats- and one that was particularly interesting is the spending by the US during and after the war. Total debt increased 3 fold, yet debt as a percentage of GDP actually decreased and quite dramatically. That is without factoring in private sector investment. So it is this combined effort that is needed- however the ends are what need to be changed. We do historically have the means laid out for us- I guess we are pretty efficient at developing a destructive capacity. The question is, why is it seemingly so outside the box to have such efforts to change out future, before it turns to such a nasty history- again!
The post war period- at least in my mind was about rebuilding- and is that not- given the problems facing the planet what needs to be done- rebuilding for a sustainable future?
Here is the link to Krugman.
http://krugman.blogs.nytimes.com/2010/09/03/paradoxes-of-deleveraging-and-releveraging/