In Defence of Tuesdayâ€™s GDP Numbers
Jim and I responded somewhat differently to Tuesdayâ€™s GDP release. Jimâ€™s Globe and Mail column suggested that it was especially bad: â€œWeâ€™re clearly heading for stagnation at best, and quite possibly another â€˜double dipâ€™ downturn.â€ I perceived a ray or two of hope and told The Toronto Star: â€œIâ€™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 Tuesdayâ€™s numbers were worse than expected. If so, on what were the expectations based?
Tuesdayâ€™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 Canadaâ€™s economic performance a â€œnon-recovery.â€ 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 Canadaâ€™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, Tuesdayâ€™s numbers underscored the importance of government purchases and investments in getting Canadaâ€™s GDP back to even.
Jimâ€™s main point (and the one that got up Hlinkaâ€™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, â€œBusiness capital investment is just 6 per cent higher than it was in the trough of the recession a year ago.â€ I do not know if he was referring to â€œBusiness gross fixed capital formationâ€ in total GDP (which includes a lot of residential structures) or â€œFixed capitalâ€ from the corporate sector account.
Both measures increased by 6% over the past year. For â€œFixed capital,â€ 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 Tuesdayâ€™s figures for the second quarter provided grounds for hope rather than despair.