With the GDP release there´s always a “contribution” story to tell

In Q3 the good (3.5% annualized growth) reflected the positive contribution of personal consumption expenditure which was reinforced by inventory investment. In Q4 the 0.1% contraction (annual rate) was due to inventory investment, government spending (defense) and exports offsetting the positive contribution of the consumer and housing and equipment investments.

The headlines can be entertaining. A small sample:

  • GDP takeaways: Isn´t as bad as it looks
  • Unusual quarter of contraction doesn´t mean recession
  • GDP contraction no reason to panic

Market Monetarists eschew the “components” analysis preferring to view the “aggregate”, in particular aggregate nominal spending, or NGDP. And how has that behaved before and after Bernanke “took the Fed´s helm”?

The chart illustrates:

GDP Release_1

Note the period named “forward guidance”, during which NGDP growth was systematically above trend growth (5.5%). But this was necessary to bring the level of spending back to trend after it had grown way below trend in 2001-03.

Note also that soon after taking the helm Bernanke lets spending growth dip below trend again. And then, there´s the big plunge after mid-2008. Spending never grew strongly enough to get it back towards trend and now we learn that it only grew by a measly 0.45% (annual rate) in the last quarter of 2012!

The next two charts show the “NGDP gap” (relative to the “Great Moderation” trend). It is clear, in the first of the two charts, that the “forward guidance” period was successful in turning the falling NGDP growth trend around, taking spending back towards the trend. Again, we see that Bernanke allowed it to drop back.

GDP Release_2

The second chart shows that when Lehman folded NGDP had already fallen significantly (8%) below trend, a fact that surely goes a long way in “explaining” the gravity of the financial crisis. It also shows that the QE programs were only sufficient to break the speed at which NGDP was falling below trend. I draw a line showing what a successful QE should have accomplished.

GDP Release_3

And what was going on regarding inflation during the whole time? Unfortunately Bernanke´s FOMC got all fussy about the possibility that inflation could become a problem! And we´re still experiencing the aftereffects of that “fussiness”, with the latest indication being that the situation may still deteriorate further.

GDP Release_4

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