Economic Upswing and What These Things Mean - CC
So they -- "they" in this case being those folks over at the Commerce Department -- tell us that the economy is looking good for the first quarter, 3.5% "good," in fact. But what exactly does that mean, and what is 3.5% referring to?
I decided to take this otherwise only moderately interesting news piece and ask my friend Mike about it -- get him to sort of break it down for me -- to make it more meaningful for me. And, because I'm such a nice guy, I'm posting it for you to read. Mike has an interest in economics beyond that of anyone else I know.
I'll fill in parts that aren't clear in [brackets].
Me: The article says that the economy has grown by 3.5% in the first quarter. What is your initial reaction to that?
Mike: We're talking about GDP, right?
Me: Yes.
Mike: Well for our economy, that's very good growth. Inflation plays a large part in [just how good], but 3.5 to 4% is where you want to be. If that continues as a constant growth, it shows the economy is moving farther ahead, out of recession.
Me: Stuart Hoffman, the Chief Economist at FNC Financial Services Group said that the growth rate is "right on the economy's speed limit," and if it were much higher, we would have an "inflationary accident."
Mike: That exactly right. I've seen other countries do fine at 4.5%, but if you go too fast, inflation will kick in to bring everything back down to earth.
Me: The story cites "more brisk spending on housing projects" as one reason for the pick-up.
Mike: They're probably talking about urban development, but even if they're referring to low-budget [such as Section 8] housing projects, they're using tax money or taking loans and putting it into development. That's putting money into the economy. Look at it like war, they say war is good for the economy. You get everybody working, the same as with housing projects. People buy material and start working to build houses. The capital that the company got goes into materials and labor, and that money feeds back into the economy. [It's] increasing the “velocity” of money [like energizing the flow of currency to boost trade and employment].
Me: How is the growth estimate derived?
Mike: The total revenue for a company... is their growth factor. You have Nominal GDP and Real GDP. Nominal GDP is the whole economy's [value] (all companies' goods and services, with a few exceptions, like gasoline). Real GDP is [the Nominal GDP] with inflation included.
They take Nominal GDP and they divide it by inflation. Let's use a loaf of bread. A loaf of bread maybe costs $2 today. Ten years ago, it might have only cost $1. The inflation rate could be described as 10 cents per year.
[The Nominal GDP, or the country's revenue, is adjusted for the inflation rate, yielding the Real GDP. That rate is then compared with the rate from a respective time frame, such as quarters or years. Hence, our current rate shows 3.5% growth from the previous quarter.]
Me: What can we expect in terms of job growth?
Mike: It should be good. Job growth is usually 5-6% the unemployment rate. With 3.5% GDP, you expect unemployment to decrease. If you're running a company and you know what you're doing, the 3.5% gives you confidence. If a company feels secure, they’ll generally increase production or growth. They expand either [by increasing] their capital (machinery, computers) or hiring more people [as in] (construction).
Me: The article suggests that this growth is good news for Bush as he promotes his new Social Security plan, which will have people investing in the stock market.
Mike: It should back him up, but the problem with that is that ... you see the market drop 100 points every day for a couple weeks, and then bounce back up. That's very volatile. But with the GDP at 3.5%, we’re still doing good as an end result. For people investing in the market, seeing the stock market drop is scary. A volatile market is scary, but Bush can argue it in his favor [as in], "Over the long run you’ll do good in your returns."
....
We got into a discussion about oil prices at this point.
I have a better understanding of the article after my Economics 101 discussion with Mike, and I hope the economy continues to grow at its current rate. I was born well after the cutoff birth-year for those hoping to collect Social Security benefits... I'm going to have to pick Mike's brain so I have something to retire on!
I decided to take this otherwise only moderately interesting news piece and ask my friend Mike about it -- get him to sort of break it down for me -- to make it more meaningful for me. And, because I'm such a nice guy, I'm posting it for you to read. Mike has an interest in economics beyond that of anyone else I know.
I'll fill in parts that aren't clear in [brackets].
Me: The article says that the economy has grown by 3.5% in the first quarter. What is your initial reaction to that?
Mike: We're talking about GDP, right?
Me: Yes.
Mike: Well for our economy, that's very good growth. Inflation plays a large part in [just how good], but 3.5 to 4% is where you want to be. If that continues as a constant growth, it shows the economy is moving farther ahead, out of recession.
Me: Stuart Hoffman, the Chief Economist at FNC Financial Services Group said that the growth rate is "right on the economy's speed limit," and if it were much higher, we would have an "inflationary accident."
Mike: That exactly right. I've seen other countries do fine at 4.5%, but if you go too fast, inflation will kick in to bring everything back down to earth.
Me: The story cites "more brisk spending on housing projects" as one reason for the pick-up.
Mike: They're probably talking about urban development, but even if they're referring to low-budget [such as Section 8] housing projects, they're using tax money or taking loans and putting it into development. That's putting money into the economy. Look at it like war, they say war is good for the economy. You get everybody working, the same as with housing projects. People buy material and start working to build houses. The capital that the company got goes into materials and labor, and that money feeds back into the economy. [It's] increasing the “velocity” of money [like energizing the flow of currency to boost trade and employment].
Me: How is the growth estimate derived?
Mike: The total revenue for a company... is their growth factor. You have Nominal GDP and Real GDP. Nominal GDP is the whole economy's [value] (all companies' goods and services, with a few exceptions, like gasoline). Real GDP is [the Nominal GDP] with inflation included.
They take Nominal GDP and they divide it by inflation. Let's use a loaf of bread. A loaf of bread maybe costs $2 today. Ten years ago, it might have only cost $1. The inflation rate could be described as 10 cents per year.
[The Nominal GDP, or the country's revenue, is adjusted for the inflation rate, yielding the Real GDP. That rate is then compared with the rate from a respective time frame, such as quarters or years. Hence, our current rate shows 3.5% growth from the previous quarter.]
Me: What can we expect in terms of job growth?
Mike: It should be good. Job growth is usually 5-6% the unemployment rate. With 3.5% GDP, you expect unemployment to decrease. If you're running a company and you know what you're doing, the 3.5% gives you confidence. If a company feels secure, they’ll generally increase production or growth. They expand either [by increasing] their capital (machinery, computers) or hiring more people [as in] (construction).
Me: The article suggests that this growth is good news for Bush as he promotes his new Social Security plan, which will have people investing in the stock market.
Mike: It should back him up, but the problem with that is that ... you see the market drop 100 points every day for a couple weeks, and then bounce back up. That's very volatile. But with the GDP at 3.5%, we’re still doing good as an end result. For people investing in the market, seeing the stock market drop is scary. A volatile market is scary, but Bush can argue it in his favor [as in], "Over the long run you’ll do good in your returns."
....
We got into a discussion about oil prices at this point.
I have a better understanding of the article after my Economics 101 discussion with Mike, and I hope the economy continues to grow at its current rate. I was born well after the cutoff birth-year for those hoping to collect Social Security benefits... I'm going to have to pick Mike's brain so I have something to retire on!
posted by Joseph at 11:17 PM
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