4th Quarter GDP Report

The advance announcement of real GDP for 2014 IV came out on Friday morning. The rate of growth of real GDP was estimated at an annualized rate of 2.6% for the quarter.

This is below the historical average of 3.0 to 3.5% per year, although it's little bit better than we've been averaging since the last trough in 2009.

The weak performance during this recovery is shown here:

One thing you should keep in mind, especially in Utah where everything associated with Obama typically gets the negative treatment, is that we've had 3 expansions in a row that started out weakly. In fact, if you look closely at the right hand side of the chart, you can see just the beginnings of the high growth that Clinton is remembered for, and which didn't start until about 5 years after he took office.

One of the notable things about this somewhat weak growth report is that the number was dragged down by net exports, as shown in the bottom center panel of this chart:

Recall that exports are added into GDP but imports are subtracted out.

This is perverse. Here's why.

What do you want? Goods or work? This is a no-brainer: you want the goods, and you don't want to work to get them.

But what it means for your imports to exceed your exports is that you're getting more goods for less work. That's what you want, right? Except that when we count GDP, we do the opposite.

Why do we do that? It goes back to the reasons we started measuring GDP in the first place: who was going to win a war because their economy is bigger. If you want that, you want people working and exporting, rather than importing and enjoying their stuff. In short, GDP measures what the government wants its subjects to do, not what they'd actually like.

Now, this position does require an overhaul of how we think about GDP and GDP growth. That's beyond the scope of this post. But it does mean that every time you see a GDP growth rate, you should look and see if it's boosted by exports (which is what they want but not what you want) or brought down by imports (which is what you want but not what they want).

So what does it mean that imports brought down the growth rate in the fourth quarter? It means that Americans were feeling good about the economic situation, and buying more of everything ... no matter where it was made. I don't know about you, but I feel good when I walk out of the store with more stuff ... no matter where it was made.

Read the whole thing, entitled "U.S. Economy Hits Speed Bumps" in the January 31 issue of The Wall Street Journal.