GDP Revision for 2022 IV

Revisions to GDP numbers are normal. Today's just happens to coincide well with what we're doing in lecture.

The rough draft of these numbers came out a month ago, and this is the revision. Here's the press release.

You have to scroll down a bit, but nominal GDP growth was revised upwards from 6.5%/yr to 6.7%/yr annualized. There you'll also see that the "price index for gross domestic purchases" rose from 3.2%/yr instead of 3.6%/yr. This is all from the BEA, so the price index is annualized too, unlike the CPI.

Now, going back to the top, real GDP growth was revised downwards from 2.9%/yr to 2.7%/yr annualized.

But if you look closely, the numbers don't match up. Working through this is a good exercise. 

The way that you combine the price and real GDP information to get the nominal GDP information has to check. The arithmetic is that you take the product of the gross rates and subtract one, as in: 

(1+.032)(1+.029) - 1 = .062 (for the advance estimates)

(1+.036)(1+.027) - 1 = .064 (for the second estimates)

Neither of those check.

What's going on here is a combination of two things. First off, the data from the announcement is not the right one to use. Go figure. Secondly, annualization makes a difference.

To get the right data, you need to dig a bit. Go from the BEA.gov home page, click "Data", then "By Topic", then Gross Domestic Product. Click "Tables Only" towards the bottom of the page (an Excel file will download). Nominal GDP is in the top middle of Table 3. Real GDP is towards the top right.

Nominal GDP (in billions of dollars per year) went from 25,723.7 to 26,145.0. Divide the latter by the former to get the gross rate of NDGP growth: 1.01637%/qtr. To annualize, raise that to the 4th power and get 1.0671. Subtract 1 to get the net rate, and express as the rate 6.71%/yr. Check.

You can do the same thing for real GDP (in billions of 2012 dollars). It went from 20,054.7 to 20,187.5. The gross rate is 1.00662, the annualized gross rate is 2.68%/yr. Check.

But where does the 3.9%/yr inflation rate come from that balances those two? Above, I noted there are 2 issues, but let's do the annualization first. Generally, the gross rates of real GDP growth and price growth have to be multiplied (sort of like compounding). BUT,  you need to do this with the original quarterly data, and then annualize that, rather than do it from the already annualized rates. So, the 1.00662%/qtr for real GDP has to be multiplied by an unknown (1+x)%/qtr, to get 1.01637%/qtr. Just divide those two to get 1.00968. Compound that to get 1.0393%/yr. Subtract 1 to get 3.9%/yr. Check.

Now back to the first question: where's the index that actually went up by 3.9%/yr? This requires more digging. It's called the implicit price deflator, Put that into the search bar at the top of the BEA home page. Look for a link titled "What Is an Implicit Price Deflator and Where Can I Find the GDP IPD?" In there you'll find a link to Table 1.1.9, with the data you want at the top right.

The index went up from 128.269 to 129.511 (you could think of that as the dollar prices now of stuff that cost $100 in 2012). That's a gross rate of 1.00968%/qtr. Compound that to get 1.0393%/yr, and from that the net rate of 3.9%/yr. Check. 

Don't ask me why they don't put that one in the news release. A cynical person would say it's because they had something that sounded similar (the price index for gross domestic purchases) with a smaller/better number.

A casual way of thinking about this is that while your paycheck may have gone up last quarter, over half of that was needed to cover price increases.

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In all of this, note that I don't have the advance estimate of the implicit price deflator. Couldn't find it. It is possible to find historical advance estimates, but it's not easy, and it wasn't worth more than a minute or two of trying.

But I can figure it out. Going back to the gross rates from the advance estimate — 1.065%/yr for NGDP and 1.029%/yr for real GDP, I can divide the former by the latter to get 1.035%/yr. 

So the revision said the NGDP growth rate went up by 0.2%/yr, and the RGDP growth rate went down by 0.2%/yr, and the difference (subject to rounding and compounding) is the 0.4%/yr increase in the implicit price deflator. In short, they initially underestimated inflation, and that made real GDP growth look higher than it really was.

French Social Security Trivia

Other countries face the same problems with their pay-as-you-go, cash-in-cash-out, social security systems that the U.S. does. 

In France that has led to riots of up to a million people. Keep in mind that the population of France is less than a fifth that of the U.S., so that dwarfs anything that's happened here. Ever.

The motivation was the proposed policy to raise the retirement age from 62 to 64. 

I learned a few things about this over the last few weeks. 

First, that's a mandatory retirement age for most jobs. Mandatory retirement was largely eliminated in the U.S. during the 1980s. No source for this that I can recall; something on NPR I think.

Second, I may have mentioned that other countries had these systems before the U.S. had them (at the Federal level). In France, the system dates to 1910, when the life expectancy was 51. Now it's 82.

 

Environmental Disaster in Ohio (Not Required)

Natural and environmental disasters have macroeconomic consequences. It's important to keep abreast of the news on them.

Americans have been distracted by balloon shoot downs the last 10 days or so.

Which has kept most people from knowing much about the ongoing environmental disaster in Ohio. This is looking like it may be the worst on in several years for the U.S.

The short version is that a train derailed carrying chemicals that were both hazardous to health and explosive. Due to fear of explosion, authorities started burning the stuff. Evacuations were ordered. Obstinate people wouldn't leave. Animals left out in the open have been dying. It's a mess.

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This is not required because in the long-run, maybe this turns out to be nothing to worry about. But, there's a broader point that we worry about a lot of things that aren't that important, and then use those as cover to avoid thinking about the more serious stuff.

Turkey Earthquake Update 2

It's arguable that I was premature in noting that Turkey would fare better in their recent earthquake than poorer countries might.

To some extent, given the continuing rise in the death count, my two earlier posts may seem callous.

Having said that, it's well established in economics that death tolls drop as real GDP per capita rises. The seminal paper in this literature is Kahn's 2005 paper in the Review of Economics and Statistics (if interested, an ungated working paper can be downloaded here).

Kahn looked at 57 countries over a 13 year span, totally over 4K disasters and over 800K deaths. His Figure 1 and Table 8 summarize the results that deaths are inversely related to GDP per capita, and that disasters are not more likely in poor areas. They're just not dealt with as well.

(Interestingly, his summary in Table 3 shows that Turkey is one of the worst countries for casualties from earthquakes).

Turkey Earthquake Update

The earthquake in Turkey now seems considerably worse than it did on Monday. I have heard reports that some are calling it the worst quake in the region in 2,000 years.

The pattern I outlined the other day continues to hold. Excepting the 2004 earthquake caused tsunami, all the countries above Turkey on the list of deadliest quakes are poorer than Turkey. And right behind in the casualty list is richer Japan which suffered from a bigger quake.

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There are also very sketchy reports of high casualties over the border in Syria.

The problem with this is that we may never get a solid death toll from Syria. Syria on a map is not the same thing as what is controlled by the Syrian government, since rebel groups hold large parts of the country.Neither one is likely to have the organizational ability to accurately count deaths.

Turkey Earthquake

Forgive the morbidity of all of this. My point is that economic growth saves lives.

We discussed in class the morning's news of a large earthquake in Turkey. As of 8 pm, deaths are up to 4,300 from a quake that was a 7.8 on the Richter scale.†

I pointed out that this is a better performance than other, poorer, countries in similar situations.

On NPR on the way home, they pointed out that Turkey had suffered a 7.6 in 1999 that resulted in 17K deaths, and then I found a 7.8 in Turkey in 1939 that resulted in 32K.

† The Richter scale is logarithmic with base 10. So an increase in 1 point on the scale is 10 times stronger. To compare two quakes with decimals, raise 10 to the higher Richter value, and divide by 10 raised to the lower Richter value (use Excel or a calculator, unless you want to do the binomial expansion by hand). For example, today's 7.8 quake is about 60% more powerful than the 1999 quake which was a 7.6. That doesn't necessarily imply 60% more damage, but it does suggest they're not as comparable as they look.

N.B. Keeping in mind that valid comparisons require really close Richter values, there's a similar pattern that in other countries (like India, Iran, Italy, and Haiti) that the passage of time and  economic growth, lead to fewer casualties. Also note that countries with governments generally viewed by developed nations as suspect (China from 1950 to 1980, Iran since 1980) generally have higher casualties too.

Bias In CBO Estimates

The Congressional Budget Office (CBO) produces economic reports used by Congress to justify its positions. It has mostly permanent staff, and is supposed to be non-partisan. But, it is a creature of D.C. and Congress, so I think it leans left most of the time, more left when the Democrats control both houses.

Hanno Lustig, a macroeconomist at Stanford posted a Twitter thread this week showing that it's projections about the financing of fiscal policy have been too optimistic for the last 25 years or so. This takes the form of forecasts that are always on one side of the truth: in this case on the side of "oh no government spending isn't as out of control as everyone says".

This first one shows the debt/GDP ratio (not my favorite statistic, but the choice is theirs not mine) in black. Every year they make forecasts going several years into the future. Before 2000 they were forecasting it to get bigger and it didn't. Since then they've forecast it to get bigger, and its's outpaced their forecasts.

The story is the same for deficit/GDP ratio (a more useful statistic). Here surpluses are above 0 and deficits are below it. They had a good mix of forecasts before 2000. But since then, they've mostly forecast deficits to be smaller than they actually were.

In defense of the CBO, they are tasked with analyzing bills as written. Members of Congress have gotten very good at writing into law social policies with expiration dates ... that everyone knows will be renewed rather than allowed to go away. But because they do expire formally, the CBO isn't allowed to take into account what everyone knows is going to happen. That happens with tax cuts sometimes too: reductions in FICO taxes late in the Bush II administration persisted for longer than intended because Obama didn't find it politically feasible to have them cancelled.

 

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One other thing to note about the colored forecasts. They all have a lot more variation towards their left than towards their right. This is mentioned further down in the thread, and is evidence that the forecasts are mean-reverting. This means they kind of behave like a guitar string being plucked (in one direction), and then vibrating back and forth a bit, before settling down to where it was before.

 

Mean reversion is a property of many time series whose behavior is tied to some fundamental value like its mean. Note that the black lines, showing actual political outcomes appear unhinged rather than tied to some fundamental.