There´s nothing “Solid” about the GDP report

I think that when referring to GDP reports the meaning of “solid” has been degraded. But that´s how Jim Hamilton refers to the BEA´s GDP release. According to Jim:

Almost all the components of GDP contributed, with solid gains in consumption, nonresidential fixed investment, and government spending. Even imports were down and exports were up, though some deterioration in that last category is a distinct possibility if concerns of a slowdown outside the U.S. prove justified. Inventory drawdown exerted a slight drag on GDP.

This way of looking at GDP always reminds me of an early Scott Sumner post: GDP=Gross Deceptive Partitioning.

So, why is the economy mired in what I recently labelled a “Monotonic Depression”?

Solid Report_1

Forget about analyzing the components. At each release there´s a new “hero”. This time around there was a lot of “kudos” to military expenditures (maybe ISIS helped!)

The next chart gives a more realistic picture of the economy, showing the mediocre more recent stability of NGDP growth at the same time explaining the monetary causes of the “monotonic depression”.

The economic fall-out is the result of monetary contraction; with money supply not offsetting the fall in velocity.

Solid Report_2

The recovery after mid-2009 is a consequence of QE1 and the attendant rise in velocity (despite a continuing fall in money supply initially), with the relatively stable NGDP growth since mid-2010 the result of velocity and money growing at low levels.

It turns out the “GDP components” will behave in whatever way, but as long as there´s an NGDP level target, money supply and/or velocity will be such as to get NGDP to the stated target, and that´s the only way to escape the “monotonic depression”.


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