Tag Archives: GDP

How to Dismantle a Gross Domestic Product

This post isn’t going to be so much about some great insight (in fact, there’s nothing totally new in here at all). It’s about an observation I made that I never really spent too much time thinking about before, and I figured chances are some others might find this interesting as well. The basic realization I had was this: the US and Europe (or, more accurately for my purposes, the Eurozone) both cover massive areas of land, inhabited by millions of people. Yet for one of them, we get one ‘core’ statistic: US GDP. For the other, we get 17 different national GDP figures, one for each member state. Imagine the news stories if instead of focusing on Greece (Greece, I tell you!), we focused solely on aggregate Eurozone GDP vs. US GDP:

I mean sure, the US gets going much faster and the Eurozone has a double dip recession, which is a fundamental difference. And it’d still make for bleak forecasts and depressing headlines. But it’s not nearly looking as bad as Spain, Italy or Greece do when compared to the US individually:

The difference is even stronger when looking at unemployment (feel free to check FRED, but this post really can’t take any more graphs than these two and the next one). The Eurozone as a whole stacks up a lot better compared to the US than some of its members do on their own. So I’ve been asking myself why it is that we choose to look at the GDP and unemployment figures of single European countries instead of looking at the Eurozone as a whole. Likewise, why is it that we choose to look at aggregate US GDP, instead of dividing that up by state?

It’s not that the US moves totally in tandem, and so policy recommendations wouldn’t differ depending on which measure you use. There are really strong differences in states’ reactions to the financial crisis:

Michigan not looking so great, and even California wasn’t quite back on track in 2012 (these data tend to be available a little later than the aggregate figures for the US as a whole). But look at Texas, only a short period of stagnation (beginning before the crisis), and that’s basically it. And North Dakota just breezes past everybody else, not even noticing the crisis.

If these states had all had separate central banks and fully independent governments, I’d wager their reactions to the crisis would have been vastly different. Yet because the US has a federal government, they all implemented the same policy. They all got the same federal funds rate, the same QE, and the same stimulus bill. Which means that this policy probably wasn’t exactly ideal for any of them.

Europe didn’t really have individual policies either, because there’s only one ECB and austerity measures were enacted across the continent. Which definitely wasn’t ideal for anybody (by a long shot).

I don’t want to discuss here whether the aggregate figures are better or worse than the more detailed state-level figures. I haven’t thought about this enough myself to really render judgement here. At this point, I just find it fascinating to see how big the differences in GDP movements are when looking at either aggregate or lower-level measures. And maybe someone else shares that sentiment.

(Revised) Latin American Growth in Least Obvious Countries

Usually, when people think of Latin America’s most powerful economies, Brazil and Argentina immediately come to mind. Some may even think of Venezuela and its immense oil production. That is, of course, unless they are aware of Venezuela’s currently staggering inflation, widespread shortages, and political oppression. Yet very few think about smaller, less-developed countries like Peru, Chile, and Colombia. The notion that Brazil and Argentina are today’s strongest economies in Latin America is not entirely inaccurate, but it is misleading. Brazil, one of the BRIC countries, certainly has the largest GDP in Latin America at around $2.4 trillion. Argentina comes in at around $474.9 billion. And Venezuela’s GDP is a modest $382.42 billion. However, today we see that Peru, Chile, and Colombia are countries with high growth and low inflation- due to more free market policies in their governments.

While Brazil, Argentina and Venezuela’s growth rates and inflation tell a different story. The Instituto Brasileiro de Geografia e Estatistica stated that Brazil’s economy shrank by 0.5% in the third quarter, exceeding the 0.2% shrink expectation. An article from BBC News about Brazil’s questionable outlook, explains that Andre Perfeito (chief economist at Gradual Investimentos) plans to lower his projections for next year – from 2.7% to 2.4% or 2.5%. Flavio Serrano, economist at Espirito Santo investment bank, said “It shows that we were not able to grow despite various economic stimulus measures,” about his country.

Argentina has been suffering from a rough 10% inflation rate this past year. At the end of 2013, soaring summer temperatures, paired with regular blackouts, led the country into a frenzy. Venezuela, on the other hand, faces a whopping 50% inflation rate. Regular shortages of food, toiletries, and basic necessities have been going on for a few years now – along with daily blackouts to which citizens are already accustomed. Both countries’ immediate futures look grim at this point. And investors have noticed.

An article on the Wall Street Journal breaks down Latin America into two sides: one that favors state control and one that embraces free market. What may be surprising to many is that Brazil, Argentina, and Venezuela fall on the first side. While Mexico, Peru, Chile, and Colombia are on the side that embraces free markets. Estimates from Morgan Stanley suggest that the Pacific Alliance trade bloc (Mexico, Colombia, Peru, and Chile) is expected to grow an average of 4.25% in 2014, largely due to high levels of foreign investment and low inflation. Economists indicate that these Pacific countries are much more stable than their Atlantic counterparts, who are skeptical of globalization and give the government a significant role in their economies.

Peru is a rather unexpected example. From 2002 to 2012, its economy nearly doubled in size. GDP grew at a modest 6.3% rate in 2012 and 7% in 2011, and inflation has persisted around 2.7%. Investors are especially interested in the stable, strong growth seen in Peru – as they should be. Inside Latin America, Chile is usually thought to be the perfect model for economies. For decades, it has experienced stable and modest growth. Mexico is usually underestimated in size; but it is the second-largest economy in Latin America.

One Brazilian crudely stated “Brazil is becoming Argentina, Argentina is becoming Venezuela, and Venezuela is becoming Zimbabwe.” This may be true in the future, if these countries don’t ease up on trade restrictions and government regulation.These countries all have immense potential for explosive growth, but their governments are making it harder to reek the benefits of their resources. In my opinion, Brazil should be more open to foreign oil companies exploring and extracting oil from their waters, Venezuela’s politics need to be thrown away and reintroduced in such a way that the profits from their oil are not used to run a failure of a communist country, and Argentina should also welcome foreigners to participate in the natural gas industry (since they are having a rather hard time).

Of course these economies will continue to be the strongest in the region, at least for now. My intent is not to undermine these economies in any way, but instead to shed light on the ones that are also worth our attention right now. Investors are noticing the potential in these Pacific bloc countries. It is with much merit that attention is shifting towards these favorable economies (especially to foreign investors). We should expect to see much more growth on this side of Latin America, despite what most may have previously guessed.

Drivers of U.S. Growth in 2014: Politicians and Corporations

The outlook for U.S. growth in 2014 depends largely on the actions of politicians and corporations.

How might the actions of politicians impact U.S. growth in 2014? Easing the federal fiscal restraint and increasing government spending at the state/local levels would be very beneficial for growth. Obviously government spending brings up the conversation of public debt. On that note, the debt ceiling will need to be resolved by mid-February and it is crucial that this issue is handled swiftly. On the one hand, a positive resolution would probably result in a modest acceleration in overall growth. On the other hand, a poor resolution would probably result in  volatile financial markets and a negative impact consumer/business confidence. The last time we neared the debt ceiling, there were disturbing talks about a default on U.S. debt and the massive implications that we would face. I don’t think anyone wants to see this happen again and a better handling of it this time around is extremely important for growth in 2014.

Drawing parallels between U.S. growth and China is interesting to consider because it sparks the question of how they achieved such amazing growth. According to the Wall Street Journal, “China is an economic miracle. Lawrence Summers, the former U.S. Treasury secretary, puts it this way: When the U.S. was growing at its fastest, it doubled living standards about every 30 years. China has been doubling living standards roughly each decade for the past 30 years – and it has done so without following Washington’s playbook for development”. How on earth has China been able to do this? Maybe the U.S. should take a page out of China’s playbook in order to increase their own growth? Among many things, a big difference is that China has a massive government (technically, they are a communist country). And the Chinese government spends massive amounts of money both at a federal level and a local level. Although by no means am I promoting communism, I think it is interesting to consider the drivers of growth in China and compare them to the U.S.

How might the actions of corporations impact U.S. growth in 2014? Whether firms choose to increase spending and investment ahead of any perceived economic acceleration will also be extremely important for U.S. growth. According to the Wall Street Journal, “[America’s businesses] say they want to see the economy growing faster – generating sustained growth in demand for their goods and services – before they would be willing to splurge on new equipment, software and buildings. But lackluster business spending is one thing holding back growth”. I think this is an especially important point as well as a troubling paradox. Some firms refrain from spending when economic conditions are anything short of spectacular (although this might not be the case for all firms). However, these corporations should understand that their lack of investment is perpetuating the cycle in which there is weak economic growth. If firms hope that they can wait to invest until they see accelerating economic growth, then they may be waiting until they are dead.

Fortunately, there may soon be evidence of economic growth that would encourage firms to spend and invest. According to the Wall Street Journal, “If U.S. gross domestic product, the sum of all the goods and services produced in the economy, comes in at a 3% growth pace for the final three months of 2013, as many economists are forecasting, the economy could see the best half a year in a decade”. If this happens, then we should see corporations increase their spending and investment significantly. Investment, which is an important component of GDP, would then further spur economic growth. Although I have high hopes for U.S. growth in 2014, I think there are many parts that need to fall into place in order for the U.S. economy to finally reach escape velocity.

Latin American Growth in Least Obvious Countries

Usually, when people think of Latin America’s most powerful economies, Brazil and Argentina immediately come to mind. Some may even think of Venezuela and its immense oil production. That is, of course, unless they are aware of Venezuela’s currently staggering inflation, widespread shortages, and political oppression. The notion that these are today’s strongest economies in Latin America is not entirely inaccurate, but it is misleading. Brazil, one of the BRIC countries, certainly has the largest GDP in Latin America at around $2.4 trillion. Argentina comes in at around $474.9 billion. And Venezuela’s GDP is a modest $382.42 billion.

However, growth rates and inflation in these countries tell a different story. The Instituto Brasileiro de Geografia e Estatistica stated that Brazil’s economy shrank by 0.5% in the third quarter, exceeding the 0.2% shrink expectation. An article from BBC News about Brazil’s questionable outlook, explains that Andre Perfeito (chief economist at Gradual Investimentos) plans to lower his projections for next year – from 2.7% to 2.4% or 2.5%. Flavio Serrano, economist at Espirito Santo investment bank, said “It shows that we were not able to grow despite various economic stimulus measures,” about his country.

Argentina has been suffering from a rough 10% inflation rate this past year. At the end of 2013, soaring summer temperatures, paired with regular blackouts, led the country into a frenzy. Venezuela, on the other hand, faces a whopping 50% inflation rate. Regular shortages of food, toiletries, and basic necessities have been going on for a few years now – along with daily blackouts to which citizens are already accustomed. Both countries’ immediate futures look grim at this point. And investors have noticed.

An article on the Wall Street Journal breaks down Latin America into two sides: one that favors state control and one that embraces free market. What may be surprising to many is that Brazil, Argentina, and Venezuela fall on the first side. While Mexico, Peru, Chile, and Colombia are on the side that embraces free markets. Estimates from Morgan Stanley suggest that the Pacific Alliance trade bloc (Mexico, Colombia, Peru, and Chile) is expected to grow an average of 4.25% in 2014, largely due to high levels of foreign investment and low inflation. Economists indicate that these Pacific countries are much more stable than their Atlantic counterparts, who are skeptical of globalization and give the government a significant role in their economies.

Peru is a rather unexpected example. From 2002 to 2012, its economy nearly doubled in size. GDP grew at a modest 6.3% rate in 2012 and 7% in 2011, and inflation has persisted around 2.7%. Investors are especially interested in the stable, strong growth seen in Peru – as they should be. Inside Latin America, Chile is usually thought to be the perfect model for economies. For decades, it has experienced stable and modest growth. Mexico is usually underestimated in size; but it is the second-largest economy in Latin America.

One Brazilian crudely stated “Brazil is becoming Argentina, Argentina is becoming Venezuela, and Venezuela is becoming Zimbabwe.” This may be true in the future, if these countries don’t ease up on trade restrictions and government regulation. My intent is not to undermine these economies in any way, but instead to shed light on the ones that are also worth our attention right now. Investors are noticing the potential in these Pacific bloc countries. It is with much merit that attention is shifting towards these favorable economies (especially to foreign investors). We should expect to see much more growth on this side of Latin America, despite what most may have previously guessed.