Another dynamic to US GDP…….

Second quarter GDP grew by 1.7% (annualised), a much better pace than expected.  But the whole framework in which growth is measured has now changed.

GDP, in its key format, is a measure of the amount of expenditure in an economy in any given year: the money that consumers spend on end products and services, the money that consumers and businesses invest for future services and products and the money the government spends on the same, + or minus the difference between what we export (what foreign markets spend on our goods/services) and imports (what we spend on foreign goods/services).

Previously, certain expenditures have been treated as part of the cost of producing goods and services in the current year and so were picked up by private/government/net export expenditure.   These expenditures, research and development and intellectual property costs, are now treated as investments.   This means they are taken out of the cost of current production and added to investment, with of course no adjustment for the other expenditure components.  In other words the amount of expenditure the economy has expended in any given year has gone up.

The new format has not changed the fact that economic growth is both low and slowing (dotted lines are trend lines):

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In fact, looking at the last 3 quarters, growth (based on the new data series) is currently the weakest since the US came out of the recession.

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So let us look at some of the key differences caused by the new growth framework:

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Growth under the new framework appears to be more volatile as would be expected.   It also looks as if the differential has peaked:

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Which appears to be confirmed by an analysis of real non residential fixed investment from both the old and the new data:  the cumulative differential has been declining since Q1 2011.

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Useful reading:

Data shift to lift US economy 3%

A guide to the conceptual US GDP changes

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