Tuesday, February 01, 2005

NYT Covers the 4th Quarter GDP

Over at NRO, Larry Kudlow analyses the New York Times coverage of the GDP numbers. Link.
Both the headline and the thrust of the story by Times writer Louis Uchitelle suggest a big slowdown in economic growth. While this is statistically correct, it is analytically wrong. The main thought behind the story — that the economy has registered its “weakest quarterly pace in nearly two years, held down by a surge in imports” — is completely misleading.

Underneath the headline number of 3.1 percent real GDP growth was a huge 5.5 percent increase in private-sector output (less government spending and trade). Private consumption and business investment comprises 80 percent of GDP — a factoid the Times never relates. In fact, the tell-tale number in this latest GDP report is the outsized 15 percent gain in business investment — the single most important swing factor in economic activity.

Within this number, equipment and software investment jumped 13 percent. This is what Wall Street calls “cap ex”; it expands the entire economic infrastructure. Behind this investment explosion is the 20 percent rise in 2004 corporate profits. Business earnings allow firms to expand and grow the economy — and jobs, too. When profits rise, the economy expands. When profits fall, the economy contracts.

Meanwhile, the private domestic economy, which is the real engine of American growth, increased 5.4 percent in 2004 compared to 3.4 percent in 2003. Business investment more than doubled the gain for 2003. And, of course, 2.3 million payroll jobs were created this past year. Meanwhile, core inflation rose a tepid 1.5 percent over the past four quarters. Treasury bonds now yield a breathtakingly low 4.15 percent, a great omen for low mortgage rates and continued housing gains. At 5.4 percent unemployment, overall personal income is up about 5 percent. Pretty impressive, wouldn’t you say?

The Times, like much of the Left, is obsessed by the Trade Deficit. As an indication of how important the balance of trade is to our overall economy, bear this in mind: The US ran a consistent trade surplus throughout the Great Depression. All of our periods of greatest growth have been accompanied by trade deficits.

Today's trade deficit is because we are growing faster than most of the world, especially faster than the rest of the developed world. China, one of the fastest growing economies in the World, while maintaining a large trade surplus with the US, has a huge trade deficit with Japan, which is barely crawling out of a long stagnation.


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