In GDP Data, Signs of Healthy Structural Change

Advance US GDP data for fourth quarter of 2009 were released at the end of January. They indicate that the economy grew at a brisk 5.7 percent annual rate, up from 2.2 percent in the third quarter. Even better news, behind the headline growth rate there were some signs of healthy structural change.

One such sign was continued strong growth of exports. Imports also grew, but the net export gap, as a percentage of GDP, remained much narrower than it was during the boom of the early 2000s. Many economists have pointed to unsustainable global trade imbalances, including both US current account deficits and Chinese surpluses, as one cause of the recent crisis. It would be good for global macroeconomic stability if these imbalances were to remain more moderate as the world economy recovers.

A second sign of welcome structural change was an uptick in the personal saving rate. During the housing bubble, personal savings had fallen to extremely low levels, as households went on a credit binge and borrowed heavily against home equity. Overstretched household finances are often cited as another cause of the crisis. True, at this point in the business cycle, some observers would welcome a spurt of consumption-led growth to further speed short-term recovery of GDP. However, stronger household balance sheets are arguably more important for long-run macroeconomic health.

Finally, government purchases of goods and services, as a percent of GDP, showed a small decrease in the fourth quarter of 2009. That may come as a surprise to anyone who has turned on the TV and listened to politicians and pundits carrying on about runaway growth of government. The explanation is that the nation's budget problems (which remain very real) do not stem from growth of government consumption expenditures and investment. Instead, they arise largely from continued imbalances between tax revenues and transfer payments, which do not show up in the GDP numbers. The larger problem of fiscal imbalances will be the subject of a later posting, after the President's budget message is sent to Congress.

Follow this link for a free set of PowerPoint slides showing highlights of the Q409 GDP data. If you find these slides useful in your economics classes, please give me some feedback in the form of a comment on this posting, or an e-mail.