Friday GDP Arithmetic

We have new GDP numbers from the Department of Commerce's Bureau of Economic Analysis.

• U.S. real Gross Domestic Product grew at an annual 1.6% rate in the second quarter of this year.
• This is the second estimate for Q2 GDP. The first, released at the end of July, was +2.4%. This is therefore a downward revision, but we're still growing, albeit slowly.
• The economy is growing more slowly than it did in Q1, when it was growing at a 3.7% annual rate.

As a rule of thumb, when the economy is operating near full employment, the U.S. can sustain a long-term real GDP growth rate of between 3 and 3.5 percent. When we're operating way below capacity, as we are now, in a strong recovery you would expect and hope that we'd grow much faster than that. This is not yet a strong recovery.

I want to use this as an opportunity to explain an arithmetic point about GDP growth rates and stimulus. The conclusion sounds simple but when they see it in the numbers a lot of people get confused: When stimulus ends, the GDP growth rate goes down.

....

Imagine you have a triple espresso at 1 PM. At 4 PM you "crash" as the caffeine leaves your system. Maybe your energy is where it would have been at 4 PM had you never had that drink. Maybe it's even a little higher than it would otherwise have been, because even though the caffeine is gone, your frenetic pace over the past few hours has tapped some hidden reserve of energy that continues. Either way, it will feel like a crash as the temporary stimulus is removed.

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