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Posts tagged with: "GDPDEF"

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The stock market is not the economy

Taking a "random walk" through the data

Does the stock market tell us anything about the economy? The stock market seems to react continually to various data and economic news, and many of us follow its day-to-day changes, especially if we’re invested in it. But do fluctuations in the stock market actually reflect economic health?

The best measure we have for measuring total economic activity is GDP. But GDP is measured only quarterly and with a considerable lag. With the help of FRED, though, we can look at a decade’s worth of data to see how closely GDP relates to the stock market.

The graph above looks at quarter-to-quarter percent changes in the Dow Jones Industrial Average (DJIA), deflated to remove general price increases, and real GDP, which is by definition also deflated to remove general price increases. Of course, the stock market is very volatile, but it’s too hard to see any relationship in this line graph. A better way to visualize connections (or a lack of connections) is a scatter plot, shown below, with the same data.

If the two measures were related, we would see the points clustered in the lower left, middle, and upper right. But we don’t see that. One reason may be that the DJIA covers only 30 firms. While they’re large firms, they make up only a fraction of the economy. So we built the same graph (below) with data from the S&P500, which encompasses the 500 largest firms on the stock market. But no luck: We still don’t see any relationship.

So why are GDP and the stock market graphically unrelated? First, it’s important to understand what the value of a stock measures: the sum of discounted expected dividends plus a liquidation value of capital. In other words, what the market thinks the future dividends of the firm will be, evaluated at current prices, and what could be obtained from liquidation if the firm goes bankrupt. Note that dividends are only a small part of the firm’s income; dividends don’t account for any income that’s directed toward taxes, servicing loans and bonds, and (maybe most importantly) wages. The labor income share of total income in the economy is about 60%. And, as recently noted on this blog, the labor income share has decreased. Now, if regulation or laws reduce the bargaining power of labor, for example, labor income decreases, capital income and dividends increase, but total income may not have changed or even decreased.

How these graphs were created: Search for “Dow Jones,” select the Industrial Average series, and click on “Add to Graph.” Click on “Edit Graph,” add the “GDP deflator,” apply formula a/b, and set units to “Percent change.” From the “Add Line” tab, search for and select “real GDP,” and set units to “Percent change.” Once you restrict the sample to the last 10 years, you have the first graph. For the second, take the first, use the “Edit Graph” panel to open the “Format” tab and select type “Scatter.” For the third graph, replace the DJIA with SP500. You can then expand the sample.

Suggested by Christian Zimmermann.

View on FRED, series used in this post: DJIA, GDPC1, GDPDEF, RU3000TR, SP500

The story of storage’s success?

A look at the rise of the warehousing and storage industry

Some industries change for understandable reasons, at least in hindsight. For example, the horse buggy sector collapsed when the automobile became widespread, and the electronics industry has grown tremendously in recent decades because of innovation and high demand for its products. For some sectors, though, expansion is a little more puzzling. The graph shows some statistics about the warehousing and storage sector. What’s noticeable here is that this sector was unaffected by the previous recession and has grown quite a bit: In about 20 years, its personnel, compensation, and output all doubled. Over the same time span, real GDP grew by less than 60%. So what’s going on? Maybe the economy has shifted away from just-in-time production to processes that require more storage. Maybe the storage industry has become more competitive. Or maybe the impact of Marie Kondo’s “tidying up” efforts are more pervasive than we imagined.

How this graph was created: Search for “warehousing and storage,” select the series available in the search results, and click on “Add to Graph.” Any missing series can be searched for and added to the graph from the “Edit Graph” panel with the “Add lines” feature. For the compensation series, we need to deflate it as it is in nominal terms: open its tab, add series “GDP deflator,” and apply formula a/b. Finally, for all series, set units to 100 for 1998-01-01.

Suggested by Christian Zimmermann.

View on FRED, series used in this post: GDPDEF, N4053C0A144NBEA, N4651C0A173NBEA, USWARESTORRGSP

What a wonderful world

Tracking global GDP

Here at the FRED Blog, we often describe the economies of individual countries, but what about the world as a whole? That calculation is more complicated than you may think. It’s not sufficient to just add up all the economies’ GDPs. First, they’re all denominated in different currencies, so you need to convert them into a common currency. Second, determining what exchange rate to use isn’t straightforward: Some are set at levels that don’t correspond to market forces, and even market forces may deviate significantly from purchasing power parity across countries. Thank goodness for the World Bank, which does all these calculations for us. Now, they do make some assumptions that people may or may not agree with; but if you’re looking for the long-run picture, these assumptions shouldn’t matter much.

We offer such a picture in the FRED graph above. We still had to modify it a bit, as the World Bank series is in current U.S. dollars. To remove the impact of inflation, we divided the figures by the implicit deflator for U.S. GDP. (This is also a debatable choice, as one would ideally use a deflator for world GDP. But no such deflator is available.)

The graph shows several phases: We see steady growth until about 2002. Then we see a stronger growth spurt. And then, since 2011, we see noticeably slower growth. While this data series is based on every economy in the world, it’s most influenced by the large developed economies. Some of the larger but less-developed economies, such as China and India, have grown a lot. The growth of the latter has slowed down a bit recently, and there’s talk of secular stagnation for the former, stemming from slower productivity growth and declines in the working-age population. Return to FRED in, say, ten years to see how things have evolved, in particular whether the other developing countries have become more significant forces in driving world economic growth.

How this graph was created: Search for “world GDP,” select the series with the longest sample period, and click “Add to Graph.” From the “Edit Graph” panel, add a series by searching for “GDP deflator” and selecting the implicit GDP deflator for the U.S. Apply formula a/b.

Suggested by Christian Zimmermann.

View on FRED, series used in this post: GDPDEF, NYGDPMKTPCDWLD

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