Saturday, May 05, 2007

Nominal GDP is actually on the rise since last summer

Quite a number of people have tried to make too strong a case for a weakening economy based on weak GDP growth for Q4 and Q1. My own analysis is that the apparent weakness in Q1 was really a fluke of how inflation was measured. Annualized "real" GDP growth went from 2.6% in Q2, to 2.0% in Q3, to 2.5% in Q1, and then down to 1.3% in Q1. Apparent inflation was 3.3% in Q2, 1.8% in Q3, 1.6% in Q4, and 4.0% in Q1. I don't know anybody who honestly feels that actual inflation in the overall economy was that much higher in Q1 than over the rest of the past year.

Nominal GDP growth, which is what the government starts with before subtracting out inflation showed growth of 5.9% in Q2, 3.8% in Q3, 4.1% in Q4, and 5.3% in Q1. In other words, after bottoming in Q2 (July, August, September), nominal GDP growth has recovered and accelerated in the two quarters since the Summer.

In truth, three quarters is not much of a trend, but the key takeaway is that nominal GDP isn't even hinting at a weakening in the economy since the summer. In fact, if it is hinting at anything, it is a modest recovery and reacceleration of economic growth.

-- Jack Krupansky

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