15 January 2014

Greenspan Circuitously Predicts 2014 GDP Growth of a Trillion Dollars

In Alan Greenspan's new book, The Map and the Territory, he reports a relationship between increase in equity values (stock, bonds and homes) and GDP.

He writes, "I find that between 1970 and 2012, a 10 percent increase in market value of holdings of U.S. residents of stocks, bonds, homeowners' equity, and other assets is associated with an annual change in real GDP of 1.3 percentage points." In other words, when net worth goes up 10%, GDP the following year rises by an additional 1.3 percentage points.

I'm not sure by how much total household equity rose, but the S&P 500 went up more than 26%. Home prices went up by more than 10% in many cities, which - depending on leverage - could easily mean an increase in household equity of 20%. Bonds didn't do as well as either stocks or homes but it seems safe to assume that household equity rose by at least 10%, perhaps more than 20%.

So, if Greenspan is right, last year's gains will mean a boost to 2014 GDP of 1 to 2.5 percentage points. That would mean GDP growth of 4 to 5.5%. With 3% growth, GDP would rise half a trillion; with a 5.5% rise, GDP would rise by nearly a trillion.

The math?
Annual GDP was about $16.9 trillion as measured through the third quarter, and will likely be measured at $17.2 trillion by year end. 3% of that translates into $516 billion in additional economic growth for 2014. 5.5% of that would mean $946 billion, or nearly a trillion dollars.

The caveat?
And of course Greenspan would caution that there are a host of other factors that will determine GDP growth and those could easily mitigate (or even - as hard as it is to believe - amplify) the effect of gains in household wealth on GDP.

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