GDP from 30,000 feet

Quarterly GDP readings are notoriously volatile, and they are subject to substantial revision after the fact, so it doesn't pay to read too much into any one quarter's number. Third quarter GDP, released today, was in line with expectations, but it was disappointingly slow: a mere 1.5% annualized rate. Did the economy really take a nose dive, considering it grew at a 3.9% rate in the second quarter? Most likely not.

Given the vagaries of the quarterly numbers (see the first chart above), I've found it makes more sense to look at the rolling 2-yr annualized rate of growth of GDP, as shown in the second chart. Think of it as looking down on the economy from 30,000 feet, getting the big picture rather than the street-level map. It's clear this is a weak recovery, but notice how the pace of growth has actually picked up somewhat over the past year or so.

I'm not alone in making this observation: the bond market has figured it out too. The real yield on 5-yr TIPS has been trending higher over the past two years, tracking the rising trend in growth. The market senses that the economy is on somewhat firmer footing—even though growth is still sub-par—and thus the market is coming to accept the fact that the Fed is getting ready to raise short-term real interest rates.

In another sign that the economy is on firmer footing, weekly unemployment claims have fallen to their lowest level since 1973, and to the lowest level relative to total jobs on record (which goes back to 1967).

As the chart above suggests, the REAL big picture is one of an economy that has been growing at a sub-par pace (2.15% annualized) since the recovery began in mid-2009). If the economy had bounced back as it always did in the past, real GDP would be about 15% bigger: that translates into $2.6 trillion in "lost" income this year alone. That's arguably the measure of the cost of increased regulatory burdens, marginal tax rates that are too high, and years of Keynesian-inspired "stimulus" spending. This chart should make it painfully obvious that our highest priority should be to bend fiscal, tax, and regulatory policy in a more growth-friendly direction.