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Posted at 11:39 AM ET, 01/28/2011

Good news and bad news on GDP

By Ezra Klein

GDP grew at 3.2 percent in the fourth quarter of 2011, which isn't too bad. And as Neil Irwin notes, the underlying data is even a bit better than that. The topline number was a bit depressed, as businesses cut back on their inventory stock a bit. But those inventories will come back, and that restocking might actually boost GDP growth this quarter. Meanwhile, "final demand, which excludes that inventory swing and is a good indicator of the underlying pace of growth, rose at a whopping 7.1 percent, the strongest since 1984." So good work, American economy!

But before you get too excited, here's Paul Krugman with some cold, cold water:

Today’s GDP report puts real GDP basically back where it was in the 4th quarter of 2007 (1/10th of a percent higher, but who’s counting?) Based on the trend between the previous two business cycle peaks, the economy should have grown — had the capacity to grow — around 2.3 or 2.4 percent per year over that period, so we’re actually around 7 percent below where we should be.

And growth is chasing a moving target: growth at 3.2 percent closes less than 1 percentage point of that gap each year.

So, yippee: we’re on track to restore full employment circa 4th quarter 2018.

By Ezra Klein  | January 28, 2011; 11:39 AM ET
Categories:  Economy  
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"And growth is chasing a moving target: growth at 3.2 percent closes less than 1 percentage point of that gap each year."

As Irwin notes, a massive decrease in the rate of inventory accumulation slashed the calculted GDP number.

If final sales continues to rise rapidly, inventory accumulation will bounce back and you'll catch up to the prior trend well before 2018.

By the way, look at the following report.

Using the estimated impact on GDP, we find that outside of the ARRA estimates, GDP growth in Q4 was the strongest since ARRA was enacted (ARRA reduced GDP in 2010Q4 by 1.6% to 2.4% per the report, and boosted it in 2009Q4 by 1.6% to 4.4%).

From 2009Q1 to 2010Q4 GDP growth was, in sequence:
-4.9, -.7, 1.6, 5.0, 3.7, 1.7, 2.5, 3.2
The low estimate of ARRA's impact was:
.4, 2.8, 1.6, 0.8, 1.2, 0, -0.8, -1.6
If true, then 'organic' growth was:
-5.3, -3.5, 0, 4.2, 2.5, 1.7, 3.3, 4.8

The high estimate for ARRA's impact was:
.4, 4.8, 4.4, 3.6, 3.2, 1.6, -1.2, -2.4
If true, then 'organic' growth was:
-5.3, -5.5, -2.8, 1.4, 0.5, 0.1, 3.7, 5.6

At a minimum, growth can be strong despite fiscal drag, and if the high impact ARRA numbers are to be believed, then government stimulus appears to depress the private sector, as growth ex-stimulus impact didn't take off until ARRA started to fade away.

Posted by: justin84 | January 28, 2011 12:37 PM | Report abuse

Typo: "GDP grew at 3.2 percent in the fourth quarter of 2011" should be 2010.

Posted by: vince432 | January 28, 2011 12:55 PM | Report abuse

Ya gotta love Krugman! He's as much of an economist as Ezra is a musical impressario.

No doubt if we had gone for the 1.6 trillon dollar stimulus he was pushing, things would be much better.

Posted by: johnmarshall5446 | January 28, 2011 1:25 PM | Report abuse

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