Perspectives Blog

Why GDP deserves less attention

Zach Pandl, Portfolio Manager and Strategist | August 12, 2013

In our view, gross domestic product (GDP) data are deeply flawed. To form a more accurate assessment of the economy, investors should include other measurements, such as gross domestic income. Official GDP growth was relatively soft in the first half of this year, but the broader set of activity data suggests the U.S. economy is doing just fine. Before joining Columbia Management I worked for several years as an economist at a few of the large…

Rebalancing the U.S. economy

Marie M. Schofield, CFA, Chief Economist and Senior Portfolio Manager | January 13, 2014

…m spending cuts by federal and state governments. While painful, these cuts have rebalanced budget deficits. A year ago, the U.S. budget deficit was 6.5% of gross domestic product (GDP). It will likely fall to less than 4% of GDP in last year’s fourth quarter and looks to decline to something near 3% this year. Receipts are up 13% and outlays are down 5.5% in the last year—this is admirable progress. The easing fiscal drag will add to GDP via les…

Gaps, not growth

Zach Pandl, Portfolio Manager and Strategist | February 25, 2014

…uation says that the output gap—which is just a technical name for spare capacity or economic slack—improves when growth is above potential, and worsens when growth is below potential: Output Gap = β * (GDP growth – Potential GDP growth) where beta is the Okun’s Law coefficient. The relationship is also commonly written in terms of the unemployment gap—the difference between the unemployment rate and its structural rate. Okun’s Law is at the cent…

Neutral funds rate going up?

Zach Pandl, Portfolio Manager and Strategist | May 16, 2014

…er financial/economic conditions. Activity data strongly suggest that potential growth increased at a slow pace over the last five years—which economic theory says should translate into a lower neutral funds rate. On average, GDP growth has increased only about 2.25% recovery-to-date, and yet measures of slack have improved substantially. Thus, trend growth must have been well-below historical norms. Our modelling suggests potential growth may ha…

Quality milestone in the European recovery story

March 17, 2014

…tios are close to their 2005 highs of 9.5% for constituents of the Euro Stoxx 600 Index*; last time round this presaged a capital expenditure and M&A boom in Europe. Exhibit 2: Eurozone non-residential capex as a share of GDP Source: JP Morgan Equity Strategy, December 2013 An increase in average net debt/EBITDA to 2x from the current 1.6x would provide €400 billion of firepower for growth. As with U.S. corporates, the short-term focus is li…

Income inequality, disinflation and profit growth – the role of globalization

March 10, 2014

…l profits are around 7.3% of gross domestic product (GDP) — around 1.6% above their long-term average — total profits generated by U.S.-based firms outside the United States (shown in Exhibit 2) has risen from less than 1% of GDP to around 2.5% of GDP. Exhibit 2: Profits generated outside the U.S. by U.S. firms as % of U.S. GDP Source: Bureau of Economic Analysis, Threadneedle, September 2013 The economic, policy and investment implications are…

U.S. rates – Waiting for the sound

Zach Pandl, Portfolio Manager and Strategist | May 5, 2014

Latest data showing faster growth and shrinking gaps. Normalizing economy creates asymmetry in monetary policy outlook. Fed officials might need to make a sound before interest rates move higher in more meaningful way. By now it is widely appreciated that gross domestic product (GDP) is a deeply flawed tool for tracking economic growth. But the contrast between the Q1 GDP report and other available data on the economy was nonetheless remarkabl…