ElStat, the Greek statistical institute, has recently published a flash estimate for GDP in the second quarter of 2014. In current euro prices, GDP keeps falling by 2.5% against the same quarter of 2013. We already know many will claim this as a success of the austerity plans, since the fall is now slower than in previous quarters … but output is still falling.

It is also interesting to note that the flash estimate has also revised GDP in the first quarter of 2014, lowering it by 1% against the previous GDP estimate (see chart). The revision is larger on the current price GDP, against constant price GDP, which implies that the new estimate of the fall in prices is larger than it was.

Our last analysis of the Greek economy is available here

Today’s GDP report estimated that the US economy grew at an annual rate of 2.5 percent in the first quarter of 2013.  If the economy were translating GDP growth into jobs at rates similar to those seen in the past, this 2.5 percent pace would not get us to full employment until, say, the end of Hillary Clinton or Jeb Bush’s second term.  But evidence suggests that, in fact, the link between output and jobs has been weakening for the past thirty years or so.  In other words, we need higher growth rates today than we did thirty years ago to produce the same employment increases.  In that context, 2.5 percent growth is nowhere near good enough.

In a new policy note, Michalis Nikiforos looks closely at US employment recovery (or lack thereof) after the “Great Recession.”  In part, the dismal job creation record — which, says Nikiforos, is more accurately reflected by looking at the total number of employed workers rather than just the unemployment rate — is due to slow growth rates.  Such slow growth is to be expected for an economy recovering from a financial crisis, he explains:  “following the burst of a bubble and a financial crisis, the private sector seeks to minimize the debt it accumulated before the crisis.  This leads to a large private sector financial surplus, which in turn weakens demand and thus output growth.”

But in addition to these slow growth rates, Nikiforos details the increasingly weak link between output growth and job creation:  “[D]uring the recovery in the second half of the 1970s, a 1 percent increase in output led to an increase in employment of 0.714 percent. This number has been decreasing since the late 1970s and stands at 0.288 in the current recovery (i.e. 2009Q2–2012Q4).”  In the policy note he runs through some possible reasons for this degraded link between output and jobs (including some research from a forthcoming paper by Deepankar Basu and Duncan Foley that points the finger at the growing share of the financial sector in GDP, which, they argue, leads to an overestimation of real economic activity).  To give a sense of the challenge we’re facing, Nikiforos observes that just bringing the unemployment rate down to 5.5 percent by the end of 2014 would require the economy to grow at an annualized rate of 3.4 percent this year and 6.3 percent next year.

Read the policy note here.

(Note: this is a follow-up to the Levy Institute’s most recent Strategic Analysis.)

Germany’s Federal Statistical Office released its first estimate of German GDP in 2012 at a press conference held in Wiesbaden yesterday: “German economy withstands the European economic crisis in 2012.” Reporting that growth slowed markedly in Germany last year, down to only 0.7 percent from 3 percent in 2011 and 4.2 percent in 2010, the international media seemed to pin the slump (the Office’s estimate assumes a contraction in GDP of 0.5 percent in the final quarter) on the euro crisis (FT.com:  “Germany hit by debt crisis turbulence”; WSJ.com: “Euro crisis damps German growth”).

It is rather unsurprising that German exports have not been doing so well in the crisis-stricken countries of the euro area of late. Germany’s trade and current account surpluses with its euro partners have declined significantly. But so far the crisis has actually been a mixed blessing overall. For one thing, benefiting from its haven status, Germany’s interest rates and financing costs are extremely favorable. While lending support to property markets, finance minister Wolfgang Schäuble enjoyed a nice windfall too, as Germany’s general government budget ended the year with a small surplus, in part owing to savings on debt interest payments (much in contrast to his partners elsewhere in the area).

But that is far from all. continue reading…

We end the week with news of only modest economic growth, but also with a set of revised data that does not seriously worsen the economic outlook. Today the Bureau of Economic Analysis announced the release of an advanced estimate of 2^nd quarter GDP, as well as revised data for 2009Q1 through 2012Q1. Their press release notes that:

“Real gross domestic product—the output of goods and services produced by labor and property located in the United States—increased at an annual rate of 1.5 percent in the second quarter of 2012, (that is, from the first quarter to the second quarter), according to the “advance” estimate released by the Bureau of Economic Analysis. In the first quarter, real GDP increased 2.0 percent.”

An article from the FT  points out that consumption grew by 1.5 percent, while government spending at all levels of government fell by 1.4 percent. Leaving the drop in government spending out of the calculation would raise the overall growth rate to 1.8 percent per year, or .3 percent higher than the actual figure released today.

Here is a graphical comparison of the old and new data series:

As the figure shows, the new data series implies that the fall in real GDP during the 2007–09 recession was not as deep as previously believed, though this difference is rather small. (Note: This earlier FT article mentions some of the reasons the GDP series needs to be revised, and well as some of the anticipated policy implications of today’s data release.)

Also, the revisions make only a slight difference in an estimated trend line for all the data, as seen in the figure below, where the blue line is hidden behind the red one. However, these trend lines are much different from a similar estimate constructed using prerecession data (1947Q1–2007Q3) only, which is also seen below.

The continuing weakness of the actual GDP data compared to the prerecession trend line provides further support to the notion that the economy has a lot of extra room to grow. In other words, such a sharp drop in economic activity relative to an existing trend is an indication that private-sector output can recover to a great extent without straining supplies of labor and most other resources. Hence, economic stimulus designed to increase aggregate demand is in order, as we have argued for some time. The reported decline in government spending is of some concern indeed.

These numbers of course do not constitute a good measure of national well-being, but at their recent levels, they are symptomatic of an economy experiencing a prolonged period of high unemployment rates, which can contribute to many other social and economic problems.

Postscript, July 27: Interesting, same-day posts by New York Times bloggers  point out that the revised data reveal a shrinking government sector and analyze the effects of the revisions.

At the last meeting of the American Economic Association in Denver, Giuseppe Fontana discussed the theoretical arguments on whether the Great Recession will generate a permanent loss in output. He argued that, according to the dominant “New Consensus” theory, output should return to its historical path once the shock has been absorbed. Alternative, heterodox theories, suggest that the shock will have permanent effects.

In the chart we plot U.S. real GDP along with its trend, estimated using a simple exponential function over the pre-recession period (from 1970 to 2007). The average growth rate in output over this period was slightly above 3 percent. The dotted red line plots the evolution of GDP, should it resume its average, pre-recession, growth rate. The red line therefore represents the idea that the recession will have permanent effects. The green dashed line has been drawn under the assumption that the economy gets back to its pre-recession growth path by the end of 2015.

Real GDP needs to grow at 5.2 percent from now to 2015, to achieve this result…

A post in the Wall Street Journal’s Real Time Economics blog notes that counting research and development as investment rather than as an expense would have increased gross domestic product by 2.7 percent between 1998 and 2007 (they refer to new numbers from the BEA). If this were standard national accounting practice, then measured GDP would have grown 0.2 percent faster, or an average of 3 percent annually. It makes some sense to treat R&D as an investment, but this item begs the question: would anyone have been better off if we did?