The Confusing Interpretation of US GDP vs. Mexico – El Financiero

last week Economic Analysis Bureau The (BEA) of the United States released the Gross Domestic Product (GDP) for the second quarter of 2022 for the US economy and INEGI did the same with our country’s GDP for the period from April to June of this year (‘preliminary estimate’). The US GDP contracted by 0.9 percent at a quarterly rate. This is the second consecutive quarter in which US GDP has recorded a negative quarterly rate (1Q22: -1.6 per cent). It should be noted that the media often describe this situation as a “technical stagnation”. For its part, Mexico’s GDP recorded a quarterly growth rate of 1.0 percent in the second quarter of 22. It should be noted that the GDP grew by 3.0 percent in the first quarter of 22. Then…

(1) … How do we explain this difference in economic growth between our country and the United States? First of all, I find it necessary to compare “pear with pear”. For this, it is necessary to “reduce” the annual, quarterly rates in the United States. For this there is a “shortcut”, which is to divide by four. However, it is incorrect given the “combined effect”. In other words, it should be borne in mind that the level of GDP in the third quarter, for example, should be a multiple of the level in the second quarter, which has already grown in relation to the first. If it is simply divided by four, this increase on a quarterly basis will not be taken into account. Thus, to get the “deannualized” rate for 1Q22 and 2Q22 in the US, we use the following expression: “Deannualized” rate = ({[1+(Tasa trimestral anualizada/100)]^ (1/4)} – 1) * 100. Therefore, US GDP notes rates of -0.4 and -0.2 percent in Q1 22 and Q2 22 respectively, which are already comparable to rates Mexico’s growth of 3.0 and 1.0 percent in the same quarters.

Although this wide difference between the rates in both countries is no longer apparent, it still exists. In this sense, I see that one very important aspect of explaining this difference is the post-pandemic rebound. In the case of Mexico, GDP has not yet reached the level of economic activity that it had in the first quarter of 2020, that is, before the effects of the pandemic began. I think it’s possible that Mexico’s GDP will reach that level this year. However, US GDP reached its pre-Covid level in the first quarter of ’21. So really, the economic cycles that the GDP of our northern neighbor and our country have been tracking in recent quarters are not as synchronized as we think, at least for the time being. On the other hand, I think that this was the case many years ago, when real developments in the industrial activity of both countries were observed. On the other hand, one can clearly see the impact of large stimulus packages in the US – especially fiscal – which may have had some effect in Mexico (for example remittances, manufacturing), practically does not exist in our country. This will likely exacerbate the difference. In short, Mexico’s growth account is still benefiting from the “post-pandemic recovery” and no longer in the US. Now, to put in the “missing piece of the puzzle”, I consider it appropriate to answer the second question about whether the US economy is in a recession.

(two) Is the US economy in a recession? The “two-quarters rule” frequently used by the world press has the quality of its ease of use. The major problem with this “rule” is that it is far from reality. In many cases, it identifies recessions that have not occurred and in others it does not specify which recessions have occurred (“Dating Committee for Economic Cycles in Mexico,” February 16, 2021). In particular, this rule presents two very special problems: (a) Information is lost when using data on a quarterly basis, when there are many very complete indicators of economic activity on a monthly basis; and, most importantly, (B) It does not take into account the criteria of depth, duration and spread together. For example, economic activity in the US contracted in the second quarter of ’22 mainly due to lower inventories and investment, while consumption remained very strong. Likewise, other related variables such as employment continue to show strength. That is, the contraction was not generalized. Thus, the US economy is not really destined to go into a recession. In my opinion, what is happening is that the “post-pandemic recovery effect” is over and the withdrawal of fiscal and monetary stimulus is already having an effect on the economy and is now slowing down.

As my dear friend Don Everardo Elizondo, former deputy governor of the Bank of Mexico, says, “I hope I haven’t added more confusion.”

Dear Miriam and Robin. I send you my deepest condolences on the loss of your mother a few days ago. Get a very affectionate hug.

*The author is chief Latin American economist at Barclays Bank and a member of the Mexican Economic Cycles Dating Committee.

* The opinions expressed in this column are personal.

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