GDP & Electric

Aug 31, 2022 | Ask "Z" Economist, No Bull Economics

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Executive Summary: There is an interesting 2015 article from the Fed which explains various methodologies to determine the size of the underground cash economy. One of the methodologies is to explore the relationship between electric consumption and GDP. The idea is that increasing demand for electricity reflects higher economic activity and should translate into a larger GDP. When the reported, official GDP is less than what would be expected according to electricity demand, then the difference could be attributed to the unreported cash economy. With an extra 87,000 IRS agents on tap, we thought maybe the Feds were looking to collect on some of this unreported booty & that this analysis might show a huge cash economy.

However, using total revenue for electric power distribution as a proxy data set, we found something very surprising. Starting in 2010 (when this data set first became available), electricity revenue was 0.73% of GDP. In turn, we calculated a hypothetical GDP in subsequent years by dividing the annual electric revenue by this same percentage held constant.

The hypothetical GDP based upon electricity revenue (even when accounting for higher electricity prices) has represented a steadily smaller percent of actual GDP. This suggests economic activity has been a shrinking driver for GDP since the Great Recession. Rather, reported GDP growth since the Great Recession looks more like the function of financial engineering (money printing) and, while the greenies may not like increasing electric demand & production, this is a requirement for a sound economy and society.       

Forecasting GDP by Electric Consumption Graph

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