Is economy running hot? Chilly? Latest GNP figure isn't a good gauge
Is the upswing in the United States economy too hot or too cold? Is it overheating or is it cooling off? Whatever it is doing, the recently released gross national product (GNP) figure for first-quarter 1984 does not tell us.
In the month-by-month course of the economy, the first-quarter GNP change is by now ancient history. In January, the economy soared. In February, economic activity for the most part appeared to have slowed down. And in March, the economy was dragging its heels.
A substantial rise in auto sales in early April is ironic, because most economists quoted in the news media have expressed the belief, based on March data, that the first-quarter 1984 GNP rise was overdone and the economy was slowing down.
In any event, figures tossed around concerning GNP tend to be exaggerated by the translating of a quarterly rise into an annual rate of rise.
Much was made of the fact that the preliminary first-quarter figure for annual rate of increase was 8.3 percent, compared with the earlier ''flash'' estimate of 7.2 percent.
The difference between the ''flash'' estimate of an actual first-quarter GNP level of $400 billion and the later preliminary figure of $401 billion is minuscule, about 1/4 of 1 percent. By translating the 1/4 of 1 percent into an annual rate, or four times the quarterly rate, it would appear as if the preliminary estimate was a significant full percentage point higher than the flash, which is just is not so.
With a quarterly estimation margin of error of 1/2 of 1 percent, any fuss about the latest figure suggesting the economy is rising substantially faster than previously thought should be taken with a grain of statistical salt.
But more important to the assessment of the first-quarter GNP figure is that it included February data but only estimates of March data. Actual March data now becoming available have been almost universal in their depiction of a pronounced slowdown or even absence of growth during the month.
Conceivably, the next estimate of first-quarter GNP will show a smaller rise than is now indicated. But by the time of that next estimate, in May, first-quarter data will be even less indicative of what is currently happening than it is today.
Economic upswings do not involve steady rates of rise from quarter to quarter. On the contrary, one would do well to expect quarterly GNP rates of rise to change every quarter. That has been the story of economic upswings in the past, and it has pretty much characterized this upswing as well.
As I have often mentioned in Monitor articles, the arithmetic involved illustrates why a large quarter-to-quarter rise does not mean the succeeding quarter will show a large rise. Because GNP is not published monthly, let's look at the Federal Reserve Board's index of industrial production to show how a hot quarterly rise may easily be followed by a cool quarterly rise. FRB index of industrial production (1967 EQUALS 100) Oct. '83 Nov. Dec. Jan. '84 Feb. March 155.0 155.3 156.2 158.4 160.0 160.7 Average of Average of 3rd quarter '83, 155.5 1st quarter '84 159.7
The increase from 155.5 for the fourth quarter (the average of the three months making up a quarter is the quarterly level) was 2.7 percent. (The comparable GNP rise was 2.0 percent.)
If we accept the March slowdown and envision continuing March-size increases in the next three months, we obtain the following projection: April '84 May June 161.4 162.1 162.8 Projected average of 2nd quarter '84 162.1
The increase from the first quarter (159.7) to the second quarter (162.1) increase will be 1.5 percent, only about half as much as the 2.7 percent increase from the fourth to the first quarter.
So the strong first-quarter percentage increase tells us little about where the economy is now and what the second-quarter increase will be. The crucial factor is whether the February-March slowdown was significant. That slowing is not seen in GNP quarterly data.
A sign of increasing sophistication is that most stories concerning the first-quarter GNP increase emphasized the high probability the pace would slow in the second quarter. But to those recently alarmed at an overheating economy and now exclaiming over a cool-off, we note the upsurge in auto sales in early April. Will the hot that became cool become hot again?
Such speculation has the stock market pulsating from day to day with every new piece of economic news. But the course of the business-cycle upswing in the US has seldom been smooth. As with Mark Twain's New England weather, learn to wait a minute and all will change.