U.S. GDP revision likely to lift loonie

ECONOMY LAB

U.S. GDP revision likely to lift loonie

STEPHEN GORDON

Globe and Mail Blog

Posted on Tuesday, August 2, 2011 6:40AM EDT

Stephen Gordon is a professor of economics at Laval University in Quebec City and a fellow of the Centre interuniversitaire sur le risque, les politiques économiques et l'emploi (CIRPÉE). He also maintains the economics blogWorthwhile Canadian Initiative and can be followed on Twitter.

The U.S. Bureau of Economic Analysis released its advance estimate for GDP growth on Friday, and the news was bad in several different ways. Growth in the second quarter was only 1.3 per cent, which is not a number consistent with a narrative of a strong U.S. economic recovery. Worse, the estimate for growth in the first quarter was revised from 1.8 per cent down to 0.4 per cent.

But the most disconcerting aspect of the new data release was the sharp downward revision for the entire path of GDP since 2007; see the accompanying graph.

Before Friday’s revisions, it was believed that the peak-to-trough reduction in U.S. GDP had been 4.1 per cent and that this loss had been recovered by the fourth quarter of 2010. In contrast, the most recent data tell a story in which output fell by 5 per cent, and in which this loss had still not been recovered as of the second quarter of 2011.

What does this mean? For one thing, the odds of a third round of quantitative easing on the part of the U.S. Federal Reserve have increased. A more expansionary fiscal policy is almost unthinkable given the political realities of the current Congress, so the monetary expansion is the only tool available to deal with a labour market that has still yet to show signs of recovery.

What this means for Canada is less clear. Although GDP growth rates in the two countries are highly correlated, this doesn’t necessarily mean that data revisions are similarly correlated. Statistics Canada has already revised down its preliminary estimates for 2009 GDP (see here), and its latest round of major revisions were published in May.

If Canadian numbers are not revised down, then this bad U.S. news will change little for policy-makers in Ottawa -- except for the increased likelihood of a continued appreciation of the Canadian dollar.

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