Barry Ritholtz of The Big Picture said a couple of days ago that the abysmal GDP numbers, down 6.1 percent in the first quarter, were artificially improved by the collapse of imports.
Today, he follows up with a note from an economist that explains this perverse accounting effect (emphasis mine):
“An explanation about why the decline in imports is helping GDP growth. As you know, imports are subtracted from GDP. Because imports are declining in absolute terms, you get a positive effect from a negative negative. Just to be clear as to what this chart is telling us: the drop in imports contributed 6.05 percentage points to the GDP growth rate.
In other words when you subtract a negative, you get a positive. Without that false effect, the GDP report would have been an astonishing negative 12.2 percent. That’s a capital D depression right there, folks.
It’s yet another reminder to take economic reports with a grain of salt. You’ve very often got to look behind the numbers to figure out what’s really going on.
That’s the case with the headline unemployment number. Those figures don’t include people who have given up looking for work or who are only able to find part-time work. Include them and the unemployment rate jumps by about two-thirds.
Let’s see if the big media outlets pick up on this GDP business.
Dudeski, this is the accepted formula for GDP, which measures PRODUCTION. It's like this:
GDP = Private Consumption + Investment + Government Spending + (Exports - Imports)
We subtract out import to convert Private Consumption to production. If goods being consumed were being made elsewhere, then we shouldn't count them in production. Likewise with Exports, we are producing goods that we are not consuming. So we need to account for that. Right?
#1 Posted by Chris Corliss, CJR on Fri 1 May 2009 at 11:05 AM
Hey, Chris,
I get the reason for subtracting imports, to measure domestic production. But why wouldn't the effect measured here by an artificial inflation of GDP? It's not like what we were importing we're now producing ourselves, to the tune of 6%.
Check out the bottom left of the second graph here: http://www.ritholtz.com/blog/2009/04/gdp-down-61/
#2 Posted by Ryan Chittum, CJR on Fri 1 May 2009 at 03:33 PM
It has to do with measurement. GDP = C + I + G + (X- I)
Let's imagine that we saw that that C and I and G were all going up. Great, GDP is going up and we're producing more! But wait... What if the increase in C comes from buying more Mercedes and the extra I comes from computer systems from SAP and added G is from importing weapons. That means that Americans aren't actually PRODUCING more, foreigners are. GDP measures production. We can consume more without producing more.
On the other hand. If C, G and I all stay the same but Imports go down, it must mean that we are making more of it at home.
So it's not so much that negative imports directly add to GDP. It's what lower imports say about how much of what we consume we are producing ourselves.
I think the right question to ask is whether GDP is what we care about. In the long term we need to produce, but joe six-pack cares a lot more about C(onsumption) than Production.
From the link you provide it looks like consumption got hit first, then investment got butchered, and now, strangely, government is taking a hit (mostly at the state and defense levels). One caveat is that those 4 graphs are not drawn to the same scale so the visual intuition is reduced.
#3 Posted by Chris Corliss, CJR on Fri 1 May 2009 at 04:11 PM