Stocks sold off sharply Thursday. Finally, the much anticipated correction is happening, but I don’t see any fundamental reason for the decline. It’s purely a technical correction.
Real gross domestic product (GDP) rose in the second quarter at a 4% annualized rate as a sharp improvement from the negative GDP announced in the first quarter.
The latest growth number was no surprise to Joel Stern, an adjunct finance professor at several universities and a perennial speaker at the FreedomFest conference that I chair each July in Las Vegas. Stern predicted 4% annual U.S. GDP growth this year, despite the government’s report that GDP shrank in the first quarter.
As a champion of the federal government’s decision to begin reporting the Gross Output (GO) statistic on a quarterly basis earlier this year, I consider the latest variation of the GDP reading from the first quarter to the second quarter as evidence of the value of having an alternative indicator for economic growth. The GO statistic includes business-to-business commerce, so it is a broader indicator than GDP, which excludes such activity.
Specifically, U.S. real GDP – the output of goods and services produced by labor and property located in the United States – rose at an annual rate of 4% in the second quarter, compared to a downwardly revised first quarter contraction of 2.1%, according to the Bureau of Labor Statistics.
Gross Output, a broader measure of economic growth, has shown that the economy is not as bad off as GDP figures initially suggested. GO for the first quarter, in real terms (after taking into price inflation into account), only declined slightly by 0.1%, compared to the 2.1% drop in GDP. The second-quarter GO will not be announced until November, but I will be curious to see it if deviates from GDP, as it did in the first quarter.
As Steve Landefeld, former director of the BEA, and co-editors Dale Jorgenson and William Nordhaus state in their book, “A New Architecture for the U.S. National Accounts” (University of Chicago Press, 2006), “Gross output [GO] is the natural measure of the production sector, while net output [GDP] is appropriate as a measure of welfare. Both are required in a complete system of accounts.”
Gross Output and GDP are complementary aspects of the economy. But GO does a better job of measuring total economic activity and demonstrates that business spending is holding up well and is more significant than consumer spending.
Furthermore, by using GO data, we see that consumer spending is actually less than 40% of economic activity, not the 70% figure that is often reported by the media.
Today, at 11:20 AM PT: Get the Market Movements in Advance; Williams Edge Webinar for September 22nd, 2014 | John Ransom
In Other News: Bi-Partisan Agreement that Debbie Wasserman Schultz is a Horrible Person | Michael Schaus
In Other News: State Department Covers Up for Hillary – Asks IRS How to Destroy Hard-Drives | Michael Schaus