Friday, November 6, 2009

Importing Goods for IOU's

Before we dive into the chart, let me explain what it shows....

I took the average 'real quantity index' of GDP and its components* (Table 1.1.3) throughout each of the past six decades to determine the "average" annual 10 year growth rate (i.e. not just Q3 2009 vs. Q3 1999, but Q3 1999 through Q3 2009 vs. Q3 1989 through Q3 1999). The result is the "average decades" performance of each component with the thought that this would allow us to see broader trends without the recent noise.

The way to interpret the chart is to view the absolute levels of each component (to see which areas are growing faster / slower) AND to compare those levels with that of GDP as a whole (if an area is growing faster than GDP, it is becoming a larger share of the economy).

And the Economic Trends Are?

Consumption and investment have grown faster than the broader economy as a whole over the past 50 years. In the past, this was mainly due to government spending becoming a relatively smaller part of the economy, which had continued to be the case until the most recent downturn. This trend has continued throughout this decade, with consumption and investment growing at an even faster pace than that throughout the 1980's or 1990's. All else equal, this should have meant a large jump in GDP, but all else was not equal.

Why Not?

The difference over the past decade has been that we've produced significantly less goods for the world (we've consumed them all ourselves), BUT continue to show strong demand for the world's goods and services (i.e. we're consuming those too). In other words, we're consuming at a greater rate, but not producing at a greater rate. This can be seen in the chart above... imports have grown 7% per year over the past two decades to meet our consumption demands, but while exports were able to keep up with that 7% pace throughout the 1990's, they slowed to 4% per year over the past decade.

The result?

Consumption and investment grew by 4% and 4.5% respectively over the past decade, but the economy only grew by a little more than 3%. Prior to this past decade, growth in imports was offset by growth in net exports, or in other words... the world was just becoming global. We produced goods/services for the world and they produced goods/services for us. Then, this past decade saw a sea change... on the margin we produce "IOU's" (i.e. debt or currency) for the world and they continue produce goods/services for us.

And that is not sustainable.


* C = Consumption; I = Investment; G = Government Consumption; Ex = Exports; Im = Imports; GDP = GDP


  1. OK, many many things in here:

    1. Very Interesting graph
    2. I'd like to see *somewhere* the shares of each component, because 5% growth of consumption (say) does not have the same effect as 5% growth in investment for GDP (you might investigate teh 'contributions to %change, as you have in the past).
    3. I find it interesting to see Gov't spending slowing down in recent decades (not that it's news) --and as a side note, the appearance of bubbles after bubbles (but I'm not sure you will follow me here)
    4. The trend in private consumption is that of GDP. The problem is not private consumption but imports.
    5. Yes, trade is of paramount importance for overall performance. We cannot stress that enough. And the novelty in recent years in that area is really trade with China (and other Asian countries). But what can we do about it?
    Answer: not much. China is a developing country which uses western production techniques at a lower cost. Until they do what Japan did in 50 years, we are stuck with that. Yes we could export more, be more efficient, etc but how and export what to whom?

    As a last note, I don't buy the overconsumption story. Most of the time (as far as I know) you use consumption shares rising. Well wouldn't the share in consumption in GDP *mechanically* rise if GDP is lower, for instance when we face competition with lower wage countries? And, errr, may I ask, should we really advocate lower consumption? Looks like a recipe for disaster to me, and adding insult to injury to the current situation. We just want to grow other sectors of the economy, if that is at all possible.

  2. Very clean and elegant - love it though it took me two tries being tired and brain dead. A somewhat similar assessment comes from YoY% plus non-linear trends which'll show you how things are moving, e.g. how far GDP has fallen below trend.
    You might want to split I into RI+Capex. Results will be startling on prediction.
    Once you do that take a look at S,I and Debt by Component. Not to keep you in suspense S fell, do did I, highest growth was in 50s and 60s and Debt (Bus,Personal, Finance) skyrocketed after '83 and dereg. In other words we did it to ourselves, Wall St. was our pusher and growth is highest when savings is highest and put into productive Capex. Try it you'll not like it but it'll tell you where we're headed IMHO.

  3. dblwyo-

    surprising (to me) is that residential investment grew slower than other fixed investment throughout the past decade:

    that said, there has been a tremendous amount of underinvestment in structures and likely over-investment (from the end of the tech boom) in equipment and software

  4. RI or Structures? RI boomed as a GDP% this last decade. BtW - it always leads the economy, cf. CalcRisk.
    Structures lag.
    On the boom - yep, exactly. You can see it in the data.

  5. dblwyo- take look at the table:

    it looks like residential investment spiked, but crashed so quickly that the average is muted over a 10 year time frame.

    brings up the interesting thought that we may have a housing shortage in the not super-distant future as residential investment will stay low for a likely over-extended period of time / population growth