San José State University
Department of Economics
Thayer Watkins
Silicon Valley
& Tornado Alley

The Amazing, Incredible Resurgence of the
American Economy in the Last Half of 2011

Supposedly the U.S. economy is undergoing a resurgence of economic growth based upon statistics provided by the Bureau of Economic Analysis (BEA) and the Bureau of Labor Statistics. According to the BEA the annualized growth rate has increased from 0.36 of 1% in the first quarter of 2011 to just under 3% in the fourth quarter. Here is the graphical record of quarterly growth rates in real GDP from 2009 to 2011.

The above profile of the growth rate in 2011 appears to indicate a virtual rebound of real economic growth.

The growth rate for the second quarter of 2011 went through some interesting gyrations. The BEA Advance (first) estimate of real GDP indicated growth rate of 1.3% per year. The second estimate was lower than the first estimate and the growth rate was reduced to 1% per year. The third and final estimate indicated a growth rate of 1.3, not because the second quarter real GDP was increased but because the BEA had revised the first quarter real GDP downward. No one cared about the revision of a past quarter's real GDP. Here is what the profile of real economic growth would have looked like without the revision of real GDP in the first quarter of 2011.

An alternate way to remove the effect of the post-final revision of the data for 2011II is to plot the growth rates over two quarters rather than one quarter. This is shown below.

In either case the appearance of a four quarter trend is reduced to the appearance of a two quarter trend.

However, the important item is the increase in the rate of growth in the fourth quarter. To explain this rise it is necessary to look at the components of demand. These are shown below.

Components of Aggregate Expenditures
(Billions of 2005 value dollars)
Gross domestic product 13331.6 13429.9 98.3
Personal consumption
9433.5 9483.7 50.2
Gross private domestic
1784.2 1869.6 85.4
Exports 1785.2 1803.9 18.7
Government consumption
expenditures and gross
2507.6 2479.8 -27.8
-27.7 -35.7 -8.0
Total Expenditures 15510.5 15637 126.5
Imports 2187.9 2208.4 20.5
Demand for
Domestic Output
13322.6 13428.6 106.0

These figures show that the largest component of the increase is private investment with consumer expenditures coming in second. It is worthwhile to look at the record of the quarterly growth rates for these two components of demand.

What is seen is that the increase in consumption is not unusual but the increase in investment expenditures is quite surprising. There had been essentially no growth in investment expenditures in the third quarter and then suddenly the growth rate of this component jumps to 19 percent. Previous to the second quarter the growth rate of investment expenditures had been declining.

The sources of this surprising growth in investment demand bear looking into.

Components of Real Private Investment Expenditures
in the Third and Fourth Quarters of 2011
(Billions of 2005 value dollars)
Structures 332.9 330.7 -2.2
Equipment and software 1,145.70 1,159.30 13.60
Residential 325.4 334.4 9.0
Change in private
-2.0 54.3 56.3
Total of
1802.0 1878.7 76.7

Thus the overwhelming proportion, 73.4%, of the increase in private investment expenditures came from the businesses building up their inventories. These are the same organizations which in the third quarter were selling off $2 billion more of inventory than they were replacing.

Components and Totals in the Real Value Statistics
of the Bureau of Economic Analysis

At this point it is necessary to note that in the real value statistics a figure for a total is not generally equal to the strict sum of its components. The current value dollar levels of the components of a quantity such as GDP are first estimated. For those values the sum of the components is equal to the total. The constant price level value of a quantity is estimated by applying a price index adjustment to its current dollar value. The price index adjustment is applied to the total and separately to the components. In this procedure there is no guarantee that the sum of the adjusted components will be equal to the adjusted total. Generally the sum and the total are not equal and statistical discrepancy is reported which is the difference between the total and the sum of the components.

The Sources of the Supposed Resurgence in Economic Growth

The above note indicates that one cannot say precisely how much of an increase in a total comes from each component. However it is clear that most of the net increase in real GDP between the third and fourth quarters of 2011 came from an increase in real private investment and most of this came from increases in inventory investment.

An increase in consumers' expenditures was also important and a review of what happened to the components is of interest.

Components of Real Consumption Expenditures
in the Third and Fourth Quarters of 2011
(Billions of 2005 value dollars)
  Third Quarter Fourth Quarter Change
Durable goods 1,277.8 1,324.1 46.3
Nondurable goods 2,073.7 2,075.7 2.0
Services 6,096.1 6,107.4 11.3
Total 9447.6 9507.2 59.6
Consumption 9,433.50 9,483.7 50.2
Statistical Discrepancy -14.1 -23.5 -9.4

The most notable feature of the above is that most of the increase came from increases in the purchases of durable goods, an investment on the part of consumers. It is notable that consumers did not choose to increase their purchases of nondurable goods or services to any great extent increased their purchases of durable goods to such a large extent. It is also notable that a statistical discrepancy of about one fifth of the change in consumption makes it inappropriate to say precisely how much came from each of the components.

The graph of the growth rates of the components of consumers' expenditures reveals that indeed the level of consumers' purchases of durable goods is volatile.

If the Resurgence is Real Where Might It Have Come From?

If we accept the estimates of the BEA then we must ask what events prompted businesses that were decreasing their inventories to suddenly start increasing them by over $50 billion. Have the Obama and his 31 commissars (a.k.a. czars) inspired businesses with confidence? Take for an example the demand of Obama that Congress pass legislation involving nearly $500 billion to build infrastructure without specifying how it was to be financed. Economists pointed out that if it was to be paid for by increased taxes on consumers that the program would not likely produce much in the way of a net increase in employment but instead a transfer from employment in consumer goods industries to the construction trades. The construction trades are more heavily unionized than other industries so the program Obama was calling for appeared to be more in nature of a payoff to organized labor for its support of him than a net benefit to workers in general. Clearly policies such as that one do not inspire confidence among business leaders.

If the resurgence of the economy is real then the most likely source of the improve optimism on the part of businesses is the onset of the political campaigns for the 2012 election and the prospect that Obama will be replaced in the presidency. Thus if he is re-elected and even perceived to be on his way to reelection then the optimism on the part of businesses will disappear and the U.S. economy will once again fall into recession.

The bottom line is that the supposed resurgence of the American economy in the second half of 2011 is incredible largely in the sense that it is not credible. But if there is a resurgence it is no vindication of the policies of the Obama administration. Instead it most likely came from a perceived end to it. A perceived continuation of the Obama Administration would quite likely depress business investment once again and bring about a return to weakling growth or even recession.

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