Really Nominal GDP
by Annaly Capital Management
Released by the BEA this morning: the advance reading of real GDP came in at 3.2% for the 4Q of 2010 (actually, it was 3.17%, but who’s counting?) versus expectations of 3.5%. There was a lot of internal noise, with large positive contributions from personal consumption and net exports, offset by negative contributions from inventories and government spending. However, the line item that jumped off the page was the GDP deflator, the measure of inflation that turns nominal GDP into real GDP.
The GDP deflator was very light at only 0.3%. If it had come in as estimated (1.6% according to Bloomberg), and all other inputs remained constant, real GDP growth would have been cut in half. A smaller deflator pads real growth by subtracting a smaller number from nominal growth. We read one possible explanation for the light deflator: oil is an import, and imports subtract from GDP, therefore higher oil prices subtracted from the GDP price index. What we do know is that the core PCE price index (a preferred Fed measure of inflation) also declined, and the GDP deflator tends to track Core PCE over time despite the quirkiness of GDP accounting. The current level of Core PCE, 0.4%, is the lowest on record since 1959.
As mentioned above, low and falling inflation has the effect of padding real GDP growth. The chart below shows the recent trend in real GDP growth.
However, remember our small and shrinking deflator? The one that we said seemed to be skewing real GDP higher? Take a historical look at nominal GDP growth, and the recent economic activity looks different.
Average nominal growth since the late 1940s is about 6.8%, which included the inflationary 1970s and early 1980s, but this doesn’t seem way off. During expansions in the past 30 years, growth has averaged about 6.4%. Current nominal growth is at 3.4% and has been trending down throughout 2010. Considering that we are 6 quarters into an expansion with plenty of unusual stimulus to boot (+$2 trillion Fed balance sheet, +$1 trillion federal deficit), this low level of nominal growth and inflation is surprising.