The gods of economic statistics are smiling on John Kerry today. This morning's second-quarter "advance" gross domestic product (GDP) report seems to confirm the view expressed in Kerry's Democratic nomination speech that the economy "can do better" what with growth rates of a mere 3 percent, which is 0.7 percent below expectations. But the gods are fickle, and we might take care in interpreting their signs.
Remember that annualized GDP growth in the first quarter was initially estimated at 4.2 percent in April, raised to 4.4 in May's "preliminary" estimates, and then "finalized" at 3.9 percent in June. Today's report revises first quarter GDP growth to 4.5 percent, but that won't be the news of the day, even though it essentially balances out 2004 as an above average year for GDP growth.
Like usual, Wall Street and the media could use a sense of perspective before proclaiming the second quarter a disappointment. Three percent growth means three percent acceleration in the value of what America produces in a year. If your car could go three percent faster than was possible a year ago, would you fire the mechanic?
It is far too easy to take progress for granted, and the expectation of constant improvement clouds appreciation for what the American economy has achieved. For example, in the thirty-three months after the 9/11 attacks, the U.S. economy has grown ten percent bigger. That is the equivalent of adding half the French economy in less than three years, hardly a sign of the doldrums.
The real gods of economic statistics are the economists at the U.S. Bureau of Economic Analysis (BEA), and their second-quarter "advance" estimate of GDP contains a handful of interesting surprises:
- Every quarter's data from 2001 forward was significantly revised. The first implication is that the 2001 recession may not have happened, at least not by the textbook definition of two straight quarters of declining GDP. Moreover, what would have been the strongest four-quarter expansion since 1984 now looks typical. For example, last year's blockbuster 8.2 percent growth rate in the third quarter has been revised down to 7.4 percent, while the "final" estimate for the second quarter of 2003 has been revised up from 3.1 to 4.1. In other words, the gods are fickle, at least in the short run.
- The GDP revision is not politically motivated but instead is a routine annual July effort at the BEA. Partisans who aim to score points should heed this key sentence in the BEA summary: "The 2001 downturn and the subsequent recovery are both milder than previously estimated." That means the looming post-bubble recession was not a crash, but the softest of soft landings, thanks to smart monetary and fiscal policy-that is, the 2001 and 2003 tax cuts. Furthermore, pundits who refer to the weakness of the current recovery are only telling half the story. GDP need not recover by $2 trillion if it never contracted by $2 trillion; nor do jobs need to recover if total employment never collapsed like in typical recessions.
- The components of GDP reveal that investment surged in the second quarter, while consumption maintained the same level as in the first quarter. The four-quarter average of total investment growth is now at 15.4 percent, a rate not seen since early 1998 and a sure sign that the 2003 tax law's incentives to promote investment were effective. Fixed investment has never been higher, and the housing boom continues unabated.
- For perspective, the average rate of GDP growth over the last two decades is 3.2 percent. Over the same time, exports have grown by an average annualized rate of 6.9 percent per quarter, and imports by 7.4 percent. Economists will tell you that one of the main reasons the United States has grown so impressively is because of its openness to free trade, evidenced by the rapid expansion of imports and exports, and the specialization and efficiency implied.
In sum, economic pessimists are likely to point to the GDP growth rate of a mere 3 percent as proof that the economy can do better. John Kerry may be dead right that the economy can do better, but an honest assessment has also to admit that the economy is doing very well to start with. Even those smiling gods may in fact be smirking, because the data tell a far more pro-trade, pro-investment, and pro-supply-side story than the pessimists will admit.
Hostile anti-trade rhetoric stands in stark contrast to the major contributions that trade in goods and services is making to today's economy. Just look at how exports have stoked manufacturing and the service industries in recent quarters and how imports and outsourcing have kept core inflation low, to consumers' ultimate benefit. The pessimists' anti-trade policies, if realized, would cause a "good old" deep recession of the sort that we managed to avoid in 2001. And the gods of statistics would have the last laugh: what else could change America's ambivalence towards the pace of incremental progress?
Tim Kane, Ph.D., is Research Fellow in the Center for Data Analysis at The Heritage Foundation.