The U$ Economy After GDP Revisions
Gucci, downtown Detroit. Photo: Jeffrey St. Clair.
The revisions to GDP data generally are not of much interest to anyone except a small group of economics nerds who follow the data closely. However, this year’s revisions are a big deal which should interest many people. Basically, they tell us a story of an economy that has performed substantially better since the pandemic than we had previously believed.
The highlights are:
+ An economy that grew substantially more rapidly than previously believed and far faster than other wealthy countries
+ Substantially more rapid productivity growth, suggesting more rapid gains in wages and living standards and a smaller burden of the national debt;
+ Higher income growth than previously reported, with both more wages and more profits;
+ A higher saving rate, meaning that the stories about people having to spend down their savings were nonsense.
There were also a couple of not-so-good items:
+ A higher profit share that is still near a post-pandemic peak;
+ A lower implicit corporate tax rate, although still well above the 2019 level.
Faster GDP Growth
Starting with GDP growth, the revisions indicate that GDP grew a cumulative total of 1.3 percent more than previously reported. This puts cumulative GDP growth since the fourth quarter of 2019 at 10.7 percent.
By comparison, among the G-7 Italy comes in second with 5.1 percent cumulative growth, less than half of the U.S. growth. Japan comes next at 2.4 percent (less than one-fourth the U.S. rate) and at the rear are the U.K. at -0.9 percent, Germany at -1.8 percent, and Canada -3.0 percent.
The growth we have been seeing is even more than was predicted before the pandemic. At the start of 2020, CBO projected that the economy would grow 8.2 percent between the fourth quarter of 2019 and the second quarter of 2024. The difference comes to almost $660 billion in annual output, or nearly $2,000 for every person in the country.
This means the economy under Biden-Harris has grown more rapidly than would have been expected if we had not had a worldwide pandemic. While the pandemic largely derailed growth in other major economies, it did not have that effect here. The performance since 2019 looks great by any measure, but especially if we grade on a curve.
A Productivity Speedup
Before the revisions, productivity growth averaged 1.6 percent from the fourth quarter of 2019 to the second quarter of 2024. This is slightly slower than in the four years just before the pandemic (fourth quarter of 2015 to fourth quarter of 2019), but considerably faster than the 1.1 percent average rate for the decade from the fourth quarter of 2009 to the fourth quarter of 2019.
While that story makes the case for a productivity uptick ambiguous, the picture will look much better when we factor in the effect of this revision, as well as the revision to employment growth reported last month. That revision implied that hours in the second quarter of 2024 were roughly 0.6 percent less than previously reported. With GDP now reported as being 1.3 percent higher, this means the level of productivity is roughly 1.9 percent higher in the second quarter of 2024 than is now reported. (The actual number will be somewhat different, since the calculations for both the numerator and denominator are somewhat more complicated than implied here.)
With these revisions, the average rate of productivity growth will come to roughly 2.0 percent in the years since the pandemic. This is a huge deal.
If we can sustain a 2.0 percent pace of productivity growth, it means that real wages can grow at a 2.0 percent annual rate without inflation or any erosion of profit shares (we will come back to this.) It also means that we can sustain 4.0 percent nominal wage growth, a somewhat faster pace than we are now seeing, and still hit the Fed’s 2.0 percent inflation target.
Faster productivity growth will also translate into faster GDP growth. If productivity grows 0.5 percentage points more rapidly than expected, then GDP will grow roughly 0.5 percentage points more than expected. This lowers the ratio of debt to GDP. If we sustain a 0.5 pp uptick in GDP growth for a decade, then GDP will be 5.0 percent higher ten years from now than if we didn’t have this uptick. This means, other things equal, the debt-to-GDP ratio will be 5.0 pp lower than we had expected.
For folks worried that our debt-to-GDP ratio is approaching a point where we are going to hit a crisis, this is very good news. It also is good news for those who would just rather not see such a large share of GDP handed out as interest payments on the debt.
Higher Income Growth Than We Had Thought
As noted, the revisions were larger on the income side than the output side. The cumulative revision to income was an increase of 3.8 percent. This meant both higher wages and higher profits than had previously been reported. Labor income was revised up by 1.5 percent compared to what had previously been reported. Profit income was revised up by an even larger amount, with the new figure 11.5 percent higher than the previously reported number.
There were also large revisions in percentage terms for income in proprietorships (mostly small businesses and professional practices), which were revised up by 5.4 percent. Income for farm proprietorships was revised up by an extraordinary 41.1 percent.
Saving Rate Was Revised Up
This is one outcome that was 100 percent predictable from the large statistical discrepancy (2.7 percent of GDP) between the output measure of GDP and the income side measure. These measures of GDP are defined as being equal. Revisions that moved the two measures closer together would either lower output, almost certainly meaning less consumption, or raise income, which would likely translate into higher disposable income. Either way, the saving rate would be revised upward.
That is exactly what happened in today’s report. The saving rate for the second quarter was revised up from 3.3 percent to 5.2 percent. That is somewhat below the 6.2 percent average in the four years before the pandemic, but not out of line with what we have seen in prior years. (The saving rate was 5.4 percent in 2016.)
This upward revision indicates that the whining seen in many news stories, about hard-pressed consumers being forced to draw down their savings, were not based in reality. The low saving rate reported in recent government releases was a measurement quirk, not something that existed in the world.
A Higher Profit Share
As has been widely noted, the profit share of income rose during the pandemic. This was most immediately attributed to the supply-chain problems during 2021-2022. However, as these problems receded into the past, many of us expected that the profit shares would revert to their pre-pandemic level. That does not seem to have happened.
Source: Bureau of Economic Analysis and Author’s Calculations.
With the revised data the profit share is almost back to its post-pandemic peak. It stood at 28.7 percent in the second quarter. This is down by 0.5 percentage points from its peak of 29.2 percent in the fourth quarter, but still up by more than 4.0 percentage points from the 2019 level. (This figure subtracts out the profits earned by the Federal Reserve banks from total profits.)
While the cause of this rise can be debated, its existence cannot. Whether or not greater market power is the cause, there clearly is substantial room for wages to rise at the expense of profits, unless for some reason we think the 2019 profit share was unsustainably low.
A Lower Tax Share of Corporate Profits
One unheralded success of the Biden-Harris administration was an increase in the share of corporate profits collected in taxes. This has been falling for the last five decades, partly due to a reduction in tax rates by also as a result of increased avoidance and evasion. The tax share of corporate profits has increased in recent years, presumably mostly as a result of increased enforcement.
In 2019 the share of profits paid in taxes was just 15.3 percent. In the unrevised data, the share stood at 22.3 percent in the first half of 2024. In the revised data it is 20.3 percent. This is still a considerable gain from the 2019 share, with the tax take almost one-third higher when measured as a share of corporate profits.
The Good Economic Picture Looks Even Better with Revisions
In sum, an economic picture that already looked extremely impressive before the revisions looks even better with this presumably better data. Perhaps most importantly, we now have a better story to tell about an uptick in productivity growth. If this can be sustained, the future could be much brighter than prior projections implied.
This first appeared on Dean Baker’s Beat the Press blog.
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