The GDP Number

By Matthew Yglesias

Third quarter GDP increased at a 2.5 percent annualized rate. That would be a totally respectable growth number for an economy that’s not in a recession. In other words, if we were already at full employment, this is a number that would be consistent with continued full employment and rising prosperity. But we’re not at full employment and 2.5 percent growth in real output isn’t the kind of growth that will get us back there.

But there are two better numbers in here. One is that real final sales of domestic product increased 3.6 percent in the third quarter. Final sales is what you get when you strip out inventories. It measures how much people actually bought, in other words. And a 3.6 percent annual rate of final sales is the kind of catch-up growth number that will get us back to full employment. The question becomes will final sales slow to converge with output, or will output rise to converge with final sales? If the latter, we’re in good shape, if the former we’re in for more doom. Since people are getting interested in NGDP targeting it’s interesting to report that we had annualized NGDP growth of 5 percent, which is up from 4 percent in the previous quarter. As with the RGDP number, 5 percent NGDP growth would be right on if we were starting at full employment, but what we’d like to see for next year is a “catch-up” pace that’s higher than that.

All of this should come as a reminder that even though the current level the economy is at is very bad, our growth rates are non-horrible. Which I don’t take as a cause for complacency. I take it as a cause for vigorous action. What you’re looking at here is an economy that’s not hobbled by any terrifying or intractable problems. Little pushes plus a clear signal that the Federal Reserve wants to see catch-up growth could easily get us onto the catch-up track.