This plot shows GDP (blue), which is what the economy produced. It shows (annualized) percentage growth each quarter. The red-orange line shows demand. Anything that is produced and not sold (excess supply) goes into inventories, so demand is just output (GDP) minus changes in inventories. The yellow line shows the rate of growth that the economy has to achieve to keep pace with population and productivity growth (around 2.3%).
What we see is that output began expanding in the second quarter of 2009, reached above the water line (i.e. firms started hiring) in late 2009 and early 2010, but then dipped below the water line again in the Spring/Summer, and is only now rising ever so slightly above it. Not so encouraging.
When we consider inventories we get a different story. Demand didn't start growing again until late 2009, and even then never cleared the water line. The increase in output in late 2009 and early 2010 outpaced demand, which may have caused the slowdown in output of the past several quarters.
Which brings us to right now and the spike in demand in the fourth quarter of 2010 that I talked about in my last post.
Incidentally, James Hamilton comes to somewhat different conclusion from me. He argues that inventories and imports are substitutes in the data. This would imply that some of the excess inventory accumulation of the past year is being sold at reduced prices and consumers are buying those goods in place of imported goods.
However I doubt this can explain all of the spike in demand we observe. Even if the whole fall in imports (2.4%) is assumed to have come out of inventories of imported goods, that still leaves us with around 5% growth in domestic demand, which is very different from anything we have observed so far in this recovery. The latest report may be nothing special on the output side, but I think that it's the best news we've gotten so far on the demand side.
2 comments:
Hi Jonathan. Sounds good. Actually, your conclusions from both this and the previous post sound good.
NextBlog brings me here once in a while. Don't think I've left a comment before.
In your previous post, these are really nicely put, I think:
GDP is supposed to measure current period production, so if Ford produces some cars that it doesn't sell, we want to count those in the quarter in which they are produced, not in which they are sold. So they get added to inventory.
This huge drop in inventories can't continue, since firms only have so much in inventory.
I see you are a PhD student in economics. I'm a hobbyist with a question :) You write:
Anything that is produced and not sold (excess supply) goes into inventories, so demand is just output (GDP) minus changes in inventories.
Is that a standard way of looking at demand? I don't think I've ever seen it before. Makes sense -- excluding the part of output that didn't experience "final demand." I guess what I'm asking is, You didn't make it up, did you? Why I'm asking... It is a clear concept and I might like to use it myself. Thanks.
Art S
Arthur,
Economists can mean a lot of things by the word "demand." My usage here isn't standard, but I think it's useful.
It's also not unique to me. For instance, Krugman refers to GDP minus inventories as "final demand" in this post about the inventory bounce in Q4 2009:
http://krugman.blogs.nytimes.com/2010/01/16/blip/
He links to a column in which he discusses "blips" due to inventory bounces:
http://www.nytimes.com/2010/01/04/opinion/04krugman.html
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