Historic Perspective on the State of Today’s GDP

NOTE: The following represents the analysis-based opinion of the author and do not reflect those of his employer or any other affiliations

By Kenneth Hunter, Guest Blogger

The August 27, 2010, revision of Gross Domestic Product (GDP) for the second quarter of 2010 (as well as prior quarters) shows a weakening for current growth, evidenced by a downgrade in annualized growth to 1.6%.  For those who wonder how the Bureau of Economic Analysis calculates “annualized growth,” it’s a really difficult process. They take the differential in annual GDP estimates from one quarter to the next, then multiply it by 4.

Annual examination of GDP serves the purpose of the media and politicians, and it provides little to no value for us concerned about low-term economic outlooks. For people involved in the endeavor of supervising responsible government through prudent, conservative budgeting and financial management, evaluating current activity in an historic context is a responsible means of predicting the range of possible scenarios we may encounter and must prepare for. This is especially true for local governments, who must balance budgets in real terms, uphold state regulatory requirements, and maintain trust and credibility with the citizens we serve daily and directly.

Comparing chained GDP statistics on an annual basis from 1929 to the present, I noticed the 10-year rolling average of GDP growth provides some semblance of predicting a consistent trend, positive or negative. For the past 50 years, the historic average of this metric, for the purposes of a benchmark, is 3.8%. Going further into history would create distortion due to the extended hyperactivity of government spending during the Great Depression and World War II, as well as subsequent spending cuts in the late-1940’s.

Click here for the graph “10-Year Annual Average (Rolling Average) Change in Real GDP”

Starting with the early-1970’s, the rolling average remained close to the historic benchmark with minimal fluctuations. Us practitioners took this stability for granted, developing standard assumptions of annual growth for the purposes of forecasting, budgeting, and projecting the costs of future capital projects. This stability also disguised (or distorted) the long-term costs associated with expanding services, employee benefits, and other aspects of government.

Right now, we see the moving average has declined to its lowest level since the Mid-1950’s. Utilizing the revised data for the second quarter of 2010, our 10-year rolling average for GDP growth is 1.8%, continuing a downward trend starting in 2006. The historic low (1939), of course, reflects the economic realities of the Great Depression.

Our current position with respect to this metric should create concern for those committed to fiscal responsibility, as well as encourage and reinforce their efforts to promote necessary measures of discipline and austerity.  Naturally, subsequent evaluations must focus on prioritization of critical public necessities, realistic projections of current and future revenues, and an appreciation and respect for the economic hardships of the citizens we serve.  While some may be tempted to advocate for raising taxes in order to overcome short-term shortfalls and long-term deficits, we must remember that such actions will create negative externalities on those impacted directly by those increases, and subsequent negative ripple effects throughout the applicable economy.

Click here for an alternate copy of this post, including the graph image.

ASPA Member Kenneth Hunter is an MPA Graduate of The University of Georgia with more than a decade of experience in local government finance. Kenneth is the Budget & Evaluation Manager for the City of Rocky Mount, North Carolina, and serves on the Executive Committee of the Association for Budgeting & Financial Management and is a Board Member and Webmaster for the North Carolina Local Government Budget Association.

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