Final 4th Quarter GDP Growth Comes in at 2.5%; It’s Past Time to Address the Obstacles to Higher Growth
The advance release in January had 4th quarter 2006 GDP at 3.5% — and there was dancing in the streets.
Thanks to very large and unanticipated inventory reductions during the period (meaning that fewer goods were being produced than originally estimated), the February estimate for 4th quarter 2006 GDP growth was 2.2% — and there was wailing and gnashing of teeth.
Expectations ahead of yesterday’s announcement were for no change.
So what was the final number? A bit of a surprise: 2.5% (related CNN report is here). The revision occurred mostly because inventory additions (due to more goods produced) were a bit higher than estimated a month ago.
The last strong quarter of GDP growth was 2006’s first quarter (5.6%), which enabled calendar 2006 growth to come in at a respectable (but not by much) 3.3%, despite growth during the past three quarters that has been decidedly unimpressive (2.6%, 2.0%, and today’s final 2.5%). At some point, one would hope that someone in Washington starts to notice that Sarbanes Oxley is beginning to hold the economy back in a very big way, especially now that the full impact of the law is being felt down to the mid-caps and small-caps.
How quaint it is that SarBox’s Republican co-author recently admitted that it was “rushed” and “flawed,” before he left his handiwork behind and went into the private sector for a cool $10 million a year (last item at link). The incredibly complicated and time-wasting disclosure requirements relating to executive compensation that are kicking in this year also aren’t helping.
Meanwhile, Ireland, the low-tax shining star of the European Union, reported GDP growth of 6% last year. Just about every other large country in the sluggish-for-years EU would be thrilled if their GDP came in above about 2.5%. Our performance should be closer to Ireland’s than it is to the EU-PU countries. That it is not is unacceptable. Supply-side tax cuts, while wondrous in their impact, can only do so much for growth in a stifling regulatory environment.
Well, it’s official – the “Climbing Limo” method for forecasting GDP, which takes data that’s 6-12 months old to make its predictions, was off the mark for 2006-Q4 by nearly 1%. I wanted to follow that up here since I had brought the whole thing up back in January when the initial GDP data was released.
I may however, have stumbled into an improved technique that uses the most recent GDP data and Climbing Limo forecast values to better hit the target by incorporating more recent information. If the modified-Limo technique works out, we can expect just 2.2% annualized real growth for 2007-Q1.
Comment by Ironman — March 29, 2007 @ 4:07 pm
#1, color me skeptical.
Comment by TBlumer — March 29, 2007 @ 10:01 pm
#2, Skeptical is good. For what it’s worth, I have confidence in the modified approach. By itself, the climbing limo method would self-correct as new information (GDP data) is recorded, but may be considerably off target from forecast to actual values until the source data used to make the forecast fully incorporates changes in economic conditions.
The challenge for me is more about how to integrate newer information to “get there sooner” after there has been a shift in economic direction from previous periods that wouldn’t have been captured in the core method.
The trick is to do so transparently – I’m willing to be wrong and more to the point, I’ll show you how I got there. Nothing hidden, nothing being altered in an I/B/E/S-type scandal situation. And we’ll have the data soon enough to see if I’m on to something.
Comment by Ironman — March 30, 2007 @ 12:55 am