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The US economy shrank at an annualized rate of 2.9 percent in Q1

washingtonpost.com

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Re: The US economy shrank at an annualized rate of 2.9 percent in Q1

#11

Post by sp332 »

jerf wrote: post #5
smrtinsert wrote: post #4

Earlier quoted context omitted.

Could you explain this please?

"If every quarter this year was the same as this one, it would be a 2.9% decline for the year." sp332 uses the ~= symbols for approximately equal because technically you can't just divide the percentage by four like that. 2.9%/4 = .725% (exactly), but technically four quarters at .725% shrink each would produce 100%-((100%-.725%)^4) for the year, which is a 2.869...% decrease, not exactly 2.9%. But for small percents…

Do you really think it's being compounded like that? I hadn't thought of that.

Re: The US economy shrank at an annualized rate of 2.9 percent in Q1

#12

Post by badman_ting »

sp332 wrote: post #2

The economy shrank at an annualized rate of 2.9% over one quarter. That's 2.9% / 4 ~= 0.7% in Q1.

I remember idle moments during soccer games I played as a kid. I would sometimes think to myself "OK, we're up 1-0. If the rest of the game goes at this rate, we will definitely win." The problem with that reasoning is the word "if".

Re: The US economy shrank at an annualized rate of 2.9 percent in Q1

#13

Post by jerf »

sp332 wrote: post #11
jerf wrote: post #5

Earlier quoted context omitted.

"If every quarter this year was the same as this one, it would be a 2.9% decline for the year." sp332 uses the ~= symbols for approximately equal because technically you can't just divide the percentage by four like that. 2.9%/4 = .725% (exactly), but technically four quarters at .725% shrink each would produce 100%-((100%-.725%)^4) for the year, which is a 2.869...% decrease, not exactly 2.9%. But for small percents…

Do you really think it's being compounded like that? I hadn't thought of that.

Uh... are you sure you didn't think of that? ;)

Anyways, for the reasons given above, it's indistinguishable. If the economy was changing rapidly enough for it to matter, well, since it can pretty much only shrink at sufficient rates to make a difference we'd probably all have better things to do than argue about compounding correctly...

But it is worth reminding people you can't do than in general, because it is easy to forget. See also the Rule of 72: http://en.wikipedia.org/wiki/Rule_of_72

Re: The US economy shrank at an annualized rate of 2.9 percent in Q1

#15

Post by memossy »

The most interesting component of this was the healthcare drag in the revisions taking it down from the initial ones.

While a large element of this was the affordable care act, it is also notable that healthcare inflation went negative for the first time in 20 odd years last quarter (education did too, but thats another story).

Given the US currently spends twice the amount of other countries on its health care as a % of GDP (14%) for similar health outcomes and individuals are being significantly disincented to spend on healthcare via subsidies and high deductibles respectively, I think we will see increasing normalisation of healthcare spend to levels under 10% of GDP, a huge drag on GDP.

This will be further accelerated by smartphone and biometric proliferation allowing for easier and more reliable diagnosis and treatment choice.

Interesting times.

Re: The US economy shrank at an annualized rate of 2.9 percent in Q1

#16

Post by clintonc »

sp332 wrote: post #2

The economy shrank at an annualized rate of 2.9% over one quarter. That's 2.9% / 4 ~= 0.7% in Q1.

Math pedant to the rescue! Actually, rates combine in a multiplicative way -- losing 3% and then 4% does not lose 7%, (though it's close). What if the economy lost 1% each day for a year? It would not lose 365%.

If we assume the annualized rate, the economy would be 97.1% of its current size in a year. The fourth root is 99.267%, so the economy shrank about 0.733% this quarter. If it does so for four consecutive quarters, it will decrease by 2.9%.

I know that's what you said in the first place, but when extrapolating further into the future, it makes a difference.

Re: The US economy shrank at an annualized rate of 2.9 percent in Q1

#17

Post by mikeash »

Can anybody who understands this stuff better than I do comment on the winter weather factor?

To me, the "winter sucked" excuse sounds like complete BS, a transparent lie along the lines of, "Well, I just didn't want to order the tide to stop right now." This is a massive change (down a total of 7% or so from two quarters prior) and surely the weather, while unusual, wasn't that strong.

But maybe it really is a big factor. I'm far from an expert. Can anyone comment on whether the weather (heh) reasoning is sane?

Re: The US economy shrank at an annualized rate of 2.9 percent in Q1

#18

Post by sp332 »

clintonc wrote: post #16
sp332 wrote: post #2

The economy shrank at an annualized rate of 2.9% over one quarter. That's 2.9% / 4 ~= 0.7% in Q1.

Math pedant to the rescue! Actually, rates combine in a multiplicative way -- losing 3% and then 4% does not lose 7%, (though it's close). What if the economy lost 1% each day for a year? It would not lose 365%. If we assume the annualized rate, the economy would be 97.1% of its current size in a year. The fourth root is 99.267%, so the economy shrank about 0.733% this quarter. If it does so for four consecutive quar…

Actually I didn't think about annualized rates compounding like that, although it makes sense now that you mention it :)

Re: The US economy shrank at an annualized rate of 2.9 percent in Q1

#19

Post by refurb »

memossy wrote: post #15

The most interesting component of this was the healthcare drag in the revisions taking it down from the initial ones. While a large element of this was the affordable care act, it is also notable that healthcare inflation went negative for the first time in 20 odd years last quarter (education did too, but thats another story). Given the US currently spends twice the amount of other countries on its health care as a…

Unfortunately the ACA doesn't do much to address increasing healthcare costs. There are a few initiatives (comparative medicine funding is one that comes to mind) that are good starts, but the ACA is likely to lead to overall higher GDP expenditures on healthcare in the US, not lower, as more and more uninsured have access to care.

Re: The US economy shrank at an annualized rate of 2.9 percent in Q1

#20

Post by rayiner »

memossy wrote: post #15

The most interesting component of this was the healthcare drag in the revisions taking it down from the initial ones. While a large element of this was the affordable care act, it is also notable that healthcare inflation went negative for the first time in 20 odd years last quarter (education did too, but thats another story). Given the US currently spends twice the amount of other countries on its health care as a…

The healthcare example is a very good illustration of why the GDP calculation is susceptible to the broken window fallacy: http://en.wikipedia.org/wiki/Parable_of_the_broken_window.

The root of the problem is that GDP doesn't measure changes in capital stock. For example, after Fukushima, Japan's GDP ticked up slightly because of the expenditures from disaster recovery. Obviously it's absurd to conclude that Fukushima was good for the economy--the loss of capital more than outweighed the money spent fixing things. The same principle has many different implications. For example, if we reduced air pollution, expenditures on treating lung cancer would go down, hurting GDP. Countries that are heavily based on oil or mineral exports have artificially inflated GDP, because the measure excludes the decline in the value of reserves.

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