Latest GDP data show moderate economic growth but the details are telling

Posted on by Nick Bunker

Earlier today, the Bureau of Economic Analysis released the first estimate of growth in U.S. gross domestic product during the third quarter of 2014. The top line number is quite encouraging: GDP grew at a 3.5 percent annual rate this quarter.  While that rate is a slight downgrade from the 4.6 percent annual rate for this broad measure of growth in the second quarter, the rate is still relatively strong. This data release is a sign that a moderate recovery continues apace. The question is when and how the story will change.

First, it’s important to remember how preliminary these data are. This release is the first of three for GDP data for the third quarter. The Bureau of Economic Analysis will revise the data twice before we receive a final estimate. So reader beware, you might want to take these numbers with a grain of salt.

The largest contributor to GDP growth was personal consumption expenditures. Overall this component of GDP added 1.22 percentage points to the growth rate. Durable goods provided the largest share of this contribution at 0.53 percentage points. Consumption of durable goods increased by 7.2 percent over the quarter compared to 1.1 percent for nondurable goods. This difference isn’t a one quarter aberration. As economists Amir Sufi at the University of Chicago and Princeton University’s Atif Mian showed earlier this year, consumption of durable goods in the current recovery has been on pace with the historical experience. But nondurable good consumption has been weak compared to past recoveries.

Net exports contributed to growth as exports increased, adding 1.03 percentage points to GDP growth, and imports decreased, adding 0.29 percentage points. Government expenditures contributed to growth as well, adding 0.83 percentage points to the growth rate. The biggest contributor was federal defense spending.

Private domestic investment’s contribution to growth was quite modest in the third quarter, only 0.17 percentage points. Of course, the topline investment figure is obscured by the negative swing in inventory growth, which subtracted 0.57 percentage points. Fixed investment added 0.74 percentage points to growth. Residential fixed investment, also known as housing, added only 0.06 percentage points.

One way to look at this data in the least “noisy” way is to calculate GDP growth minus the change in inventories, known as real final sales, which grew by 4.2 percent in the third quarter. A similar figure is real private domestic final purchases. This number, calculated by summing consumption and fixed investment, is regarded as a better predictor of future economic growth.  This statistic went up 2.3 percent in the third quarter and is up 2.8 percent over the past 4 quarters. The growth rate of this particular measure of economic growth has been more consistent than GDP recently and has been very consistent over the economic recovery as a chart from the Council of Economic Advisers shows.

All of these different measures of various components of economic growth begin to blur together given all the data showing a moderate recovery still chugging along. The belief for years has been that more robust economic growth is just around the corner, but it has yet to materialize. At the same time, the Federal Reserve yesterday officially announced the end of the third round of quantitative easing—Fed speak for the purchase of U.S. government bonds and mortgage-backed securities to push interest rates down—and analysts believe the central bank is eyeing interest rate increases for next year.

If the current economic recovery isn’t as strong as anticipated—a likely future scenario given some of the leading indicators released today —then interest rate increases may not be in the cards.

Lunchtime Must-Read: Cardiff Garcia: Affordable Housing and the Legit Big-City Whinge

Posted on by Brad DeLong

Cardiff Garcia: Affordable Housing and the Legit Big-City Whinge: “When city-dwellers moan about their high cost of living…

…they often elicit the unsympathetic retort that they should shut up and praise the ghost of Jane Jacobs for the cultural vibrancy of their neighborhoods, the lucrative jobs, and the artisanal pizza: ‘Living in a great city is a consumption good, you whinging ninnies — you SHOULD have to pay for it! Why do you think you’re entitled to live wherever you want?’ Hey, fair enough. But there’s a difference between grumblings about $5 cinnamon macchiatos and the more useful outrage about meaningful troubles that can be solved — a difference between #firstworldproblems and the healthier expression of annoyed patriotism towards one’s habitat: ‘I like living here and want to keep living here, which is why the problems I complain about aren’t enough to push me out. I’d rather stick around and see the problems solved. But those problems suck, so let’s start doing something about them.’ To complain that rents, for instance, could and should be lower isn’t always a sign of yuppie entitlement. Nor is it mutually exclusive with appreciating the wonderful aspects of city life. Sometimes the gripe really is legitimate…

Things to Read at Lunchtime on October 30, 2014

Posted on by Brad DeLong

Must- and Shall-Reads:

 

  1. Simon Wren-Lewis: In praise of Macroeconomists (or at Least One of Them)): “One of the architects of that macroeconomic mainstream is Lars Svensson… key papers… maths and rational expectations… member of Sweden’s equivalent of the Monetary Policy Committee from 2007 to 2013…. Svensson… argued that there was still plenty of slack in the economy, and raising rates would be deflationary, so that inflation would fall well below the central bank’s target of 2%. By the end of 2012 inflation had indeed fallen to zero, and since then monthly inflation has more often been negative than positive. It was -0.4% in September. This week the Swedish central bank lowered their interest rate to zero…. Deviating from what mainstream macroeconomists in general advocate (and what one in particular recommended) has proved a costly mistake. (Svensson estimates it has cost 60,000 jobs.)… I am certainly not claiming that mainstream macroeconomics is without fault, as regular readers will know (e.g.) However it is important to recognise the achievements of macroeconomics as well as its faults. If we fail to do that, then central banks can start doing foolish things, with large costs in terms of the welfare of its country’s citizens…”

  2. Emmanuel Saez and Laura Tyson: Income Inequality in the Twenty-First Century:

  3. Jonathan Chait: Yellen Mentions Inequality; Right Scandalized: “Even the American Enterprise Institute’s Michael Strain, a moderate, wrote that Yellen is now ‘in danger of becoming a partisan hack.’… The parties don’t merely disagree about the merits of inequality, they disagree about the merits of even acknowledging it…. Remember Mitt Romney conceding that inequality should only be discussed in ‘quiet rooms’?… Merely by stating facts about inequality in public, even without taking a stand on it, Yellen has placed herself on one side of a partisan divide. It’s like saying ‘Jehovah.’ What Strain does not mention is that Yellen is hardly alone among Federal Reserve chairs…. Hardly a week went by without Greenspan interjecting himself into the political debate. And Greenspan, a former follower of Ayn Rand with staunchly conservative views, had none of Yellen’s careful reserve…. Is the new rule here that, starting now, the Federal Reserve chair has to stay completely out of partisan politics? Or is the rule that they need to stay out of politics unless they’re conservative?”

  4. Matt O’Brien: Why the Fed Is Giving Up too Soon on the Economy: “Two years and $1.7 trillion later, the Fed’s latest round of bond-buying, or QE3, is officially over. What did it get us?… The best answer is what it didn’t get us: a recession in 2013…. ‘Fiscal cliff’, ‘sequester’, and ‘debt ceiling’ might be hazy memories from a time when [the Republican House] Congress[ional Caucus] was doing its most to sabotage the recovery, so here’s a refresher…. There’s been an awful lot of austerity the last few years. Enough that the economy should have slowed down quite a bit…. But that’s not what happened…. QE… is the Fed’s way of printing its money where its mouth is when it says rates will stay low for a long time. That’s why, as economist Michael Woodford argued, QE works better when it’s used with forward guidance that makes the Fed’s promises about future policy more explicit. The question, then, is what message the Fed is sending now…”

  5. Jon Hilsenrath: Fed Critics Have Been Wrong About QE’s Most Ill Effect: “In an open letter to former Federal Reserve Chairman Ben Bernanke in 2010, a group of prominent academics and hedge fund managers urged the central bank to stop its bond purchases known as quantitative easing…. With the Fed set to end its bond-purchase program today, it is clear those warnings were wrong…. The critics also argued the QE programs distort financial markets. It is hard to prove or disprove that point. Stock market price-to-earnings ratios look stretched by some measures, but not so stretched by others. Junk bond and leveraged loan issuance has taken off, but corporate balance sheets relatively healthy…. But it is easy to see what didn’t happen. Inflation hasn’t taken off and there has been no currency debasement. Perhaps it will happen someday, but the Fed has been experimenting with QE since 2009 and it clearly hasn’t happened yet. At some point, you need to declare the debate over…”

  6. Jordan Weissman: Don’t Let Anyone Blame Single Mothers for Economic Inequality: “Conservatives… aren’t… comfy discussing… skyrocketing CEO pay and Wall Street lucre…. They are, however, extremely at home talking about… single mothers…. In that vein, the American Enterprise Institute has released a new report…. I’m… skeptical… turn[ing] the inequality debate toward single mothers and absent fathers…. As Tim Noah wrote in Slate years ago, the biggest changes in American family structure took place in the ’70s and ’80s, and they help explain why, for instance, the ratio between the 90th percentile of earners and 10th percentile is higher than it was 30 years ago. But the shift away from two-parent households doesn’t really factor into the concentration of wealth among the 1 percent. And the rise of the 1 percent, and the 0.1 percent for that matter, is the real story when it comes to how income inequality is evolving today…”

  7. Paul Krugman: When Banks Aren’t The Problem – NYTimes.com: “Sometimes it seems to me as if economists and policymakers have spent much of the past six years slowly, stumblingly figuring out stuff they would already have known if they had read my 1998 Brookings Paper (pdf) on Japan’s liquidity trap…. Huge confusion about whether Ricardian equivalence makes fiscal policy ineffective, vast amazement that increases in the monetary base haven’t led to big increases in the broader money supply… and… here we go with another: the role of troubled banks…. In the 90s it was conventional wisdom that Japan’s zombie banks were the problem, and that once they were fixed all would be well. But I took a hard look at the logic and evidence for that proposition (pp. 174-177), and it just didn’t hold up…. It has been really frustrating to watch so many people reinvent fallacies that were thoroughly refuted long ago…”

  8. Vauhini Vara: The Lowe’s Robot and the Future of Service Work: “Lowe’s plans to release several OSHbots into one of its Orchard Supply Hardware stores (the ‘OSH’ in OSHbot) in San Jose, California. The robots’ job will be to greet customers, help them find what they need, and guide them around the store. In a typical interaction, Nel told me, an OSHbot would roll up and greet you as you walked in: ‘Hi, can I help you? What are you looking for today?’ You might answer that you need to replace some plumbing pipes, prompting the OSHbot to ask whether you’ve got the original pipe. If you had it, you would put it in front of a viewfinder, and the robot would scan it, identify it, and direct you to the item in the store. It could even guide you to the place where the item is stocked. The OSHbot will be conversant in English and Spanish, to start…. Because the OSHbot’s skill set sounds at least a bit like what an Orchard salesperson typically does, a perennial question has arisen: Are robots coming for our jobs? In fact, they began stealing our jobs a long time ago…. Even if the Lowe’s OSHbot isn’t meant to replace workers, retail executives are surely aware of the opportunities to lower costs that robots could bring. ‘That is probably the most important economic phenomenon of the past decade or so,’ Erik Brynjolfsson, a professor at the Massachusetts Institute of Technology, told me…. Toward the end of our conversation, I mentioned that, during the rise of automation in manufacturing, people were encouraged to turn to service work. I wondered aloud where service workers might go if their positions, too, were to be eliminated in favor of automated replacements. ‘That is a great question,’ he said. ‘I’m not sure I know the answer. Technology has always been destroying jobs.’ He added, on a somewhat more optimistic note, ‘I think a lot of the jobs of the future have titles that we haven’t even thought of yet.’…”

Should Be Aware of:

 

  1. Anne Laurie: Long Read: “Can Scott Walker Unite the Republicans?”: “Robert Draper’s GQ profile… reads as though Draper couldn’t get a grip on his subject because Walker is that genuine political rarity: a pure sociopath, uncomplicated by the usual attendant narcissism…. From the outside, it looks like Scott Walker has prospered mightily by selling other peoples’ assets to any robber baron who made an offer, with a total lack of concern for even his closest allies and associates, enabled by a shrinking but still-powerful bloc of noisy racists and aging low-information voters. But, then, nobody said sharks aren’t dangerous!”

  2. Jonathan Chait: McConnell Afraid to Vote to Repeal Obamacare: “Mitch McConnell… asked if Republicans… would vote to repeal Obamacare… was revealingly evasive. First McConnell conceded that the Senate wouldn’t bother passing repeal because ‘Obviously, he’s not going to sign a full repeal.’ But then McConnell [said]… ‘There are pieces of it that are extremely unpopular with the American public that the Senate ought to have a chance to vote on: repealing the medical device tax, trying to restore the 40-hour work week, voting on whether or not we should continue the individual mandate, which people hate, detest and despise,’ McConnell said. ‘I think Obamacare is the single worst piece of legislation passed in the last 50 years…. I’d like to put the Senate Democrats in the position of voting on the most unpopular parts of this law and see if we can put it on the president’s desk and make him take real ownership of this highly destructive Obamacare.’ It is true that Obama would never sign a full repeal of Obamacare. He would never sign a repeal of the individual mandate, either…. [So] why won’t Republicans force Obama and Senate Democrats to defend the law as a whole? The answer is that McConnell realizes that repealing Obamacare is unpopular…”

Lunchtime Must-Read: Simon Wren-Lewis: In Praise of Macroeconomists (or at Least One of Them)

Posted on by Brad DeLong

Simon Wren-Lewis: In Praise of Macroeconomists (or at Least One of Them)): “One of the architects of that macroeconomic mainstream is Lars Svensson…

…key papers… maths and rational expectations… member of Sweden’s equivalent of the Monetary Policy Committee from 2007 to 2013…. Svensson… argued that there was still plenty of slack in the economy, and raising rates would be deflationary, so that inflation would fall well below the central bank’s target of 2%. By the end of 2012 inflation had indeed fallen to zero, and since then monthly inflation has more often been negative than positive. It was -0.4% in September. This week the Swedish central bank lowered their interest rate to zero…. Deviating from what mainstream macroeconomists in general advocate (and what one in particular recommended) has proved a costly mistake. (Svensson estimates it has cost 60,000 jobs.)… I am certainly not claiming that mainstream macroeconomics is without fault, as regular readers will know (e.g.) However it is important to recognise the achievements of macroeconomics as well as its faults. If we fail to do that, then central banks can start doing foolish things, with large costs in terms of the welfare of its country’s citizens…

The Federal Reserve Retires to Its Tent…: Morning Note on Tim Duy

Posted on by Brad DeLong

A very interesting piece by Tim Duy on the recently-concluded Federal Reserve FOMC meeting. The precis: the Federal Reserve does not view itself as moving to tighten policy, but rather as moving to a policy that is still extraordinarily stimulative–especially considering the level of the unemployment rate.

If the unemployment rate were the only piece of information we had available, I would understand the FOMC’s position. But I see 2%/year wage growth. I see a prime-age employment-to-population ratio that is still extremely low, I see Japan where Abenomics hangs in the balance and a Eurozone where a triple dip is a 50-50 chance, I see the continued failure of the Obama Administration to fill Governor slots and the resulting rightward bias of the FOMC voices…

Either the FOMC consensus or I am greatly misreading the current macroeconomic situation. It may well be me. But I do not think so…

Tim Duy: FOMC Recap: “To the extent there were any surprises, they were on the hawkish side…. The Fed dismissed the decline in market-based inflation expectations. They clearly believe financial markets over-reacted to the decline in oil prices, and that that decline would ultimately prove to be a one-time price shock rather than the beginning of a sustained disinflationary process. This is why we watch core-inflation. And note that the Fed sent a pretty big signal… they do not hold market-based measures of inflation expectations as the Holy Grail. Especially with unemployment below 6%, pay more attention to survey-based measures. And recognize they will discount even those if they feel they are unduly affected by energy prices….

I have trouble imagining a scenario in which the Fed is content to watch unemployment fall below 5.5% without at least beginning the rate hike cycle. Remember that they think that even as they increase rates, they believe that policy will continue to be accommodative. In other words, they do not fear raising rates as necessarily a tightening of policy. They will view it as a necessary adjustment in financial accommodation in response to a decline in labor market slack. Hence the line:

The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run…

Robert Waldmann: Extra Thursday DeLong QE/Risk Smackdown: Morning Comment

Posted on by Brad DeLong

Robert Waldmann: Extra Thursday DeLong Smackdown: “The fact that the economy seems desperately in need of looser monetary policy…

…after massive QE tends to suggest that QE just doesn’t work. In 2010 it was possible to argue that massive purchases of long term treasuries would have an effect similar to reductions in the Federal Funds rate. Now not so much.

I do object to your identifying the risk born by the Fed with ‘duration risk’. That is true only of the pointless QE based on purchasing long term treasuries. The Fed also bought agency issued mortgage backed bonds. That is a very different kind of QE (one which I thought would work so my predictions are–as usual–bad).

I don’t see why anyone would think that the Fed bearing duration risk would stimulate fixed capital investment. Long term bonds are risky, because short term rates might go up–either because of inflation and the Fisher effect or because of high demand and FOMC fear of over heating and inflation. Actual physical capital is a hedge against these risks. That is long term bonds are a good hedge against the risk of lower than expected inflation or aggregate demand.

Making a hedge against the risks of NIPA investment more expensive is a very odd way to encourage more NIPA investment.

Risk is not a scalar. Correlations matter and some of them are negative.

Touché…

Morning Must-Read: Matt O’Brien: Why the Fed Is Giving Up too Soon on the Economy

Posted on by Brad DeLong

As I see it, Federal Reserve policy right now is reasonable only if the unemployment rate is taken as a sufficient statistic for the state of the labor market. And it seems to me the odds are 4-1 against that being true…

Matt O’Brien: Why the Fed is giving up too soon on the economy: “Two years and $1.7 trillion later…

…the Fed’s latest round of bond-buying, or QE3, is officially over. What did it get us?… The best answer is what it didn’t get us: a recession in 2013…. ‘Fiscal cliff’, ‘sequester’, and ‘debt ceiling’ might be hazy memories from a time when [the Republican House] Congress[ional Caucus] was doing its most to sabotage the recovery, so here’s a refresher…. There’s been an awful lot of austerity the last few years. Enough that the economy should have slowed down quite a bit…. But that’s not what happened…. QE… is the Fed’s way of printing its money where its mouth is when it says rates will stay low for a long time. That’s why, as economist Michael Woodford argued, QE works better when it’s used with forward guidance that makes the Fed’s promises about future policy more explicit. The question, then, is what message the Fed is sending now…

Stable families, prosperous economy

Posted on by Casey Schoeneberger

The American Enterprise Institute published a  new report earlier this week on the importance of marriage in the growth of family incomes. The topline data point that many news organizations picked up was this—“family incomes would be 44 percent higher if Americans weren’t shying away from the altar,” as U.S. News & World Report put it. The authors of the report— Urban Institute economist Robert I. Lerman and University of Virginia sociologist W. Bradford Wilcox, a visiting scholar at AEI—marshaled an impressive array of new data to examine the importance of family structure on rising income inequality in the United States.

Equally important is the need for further research on whether and how income inequality fosters the conditions that make achieving strong, stable marriages difficult for more and more Americans. Marriages do not happen in an economic vacuum, and inevitably must be sustained amid tough economic times. What’s more, the increasing diversity of family structures means these kinds of economic issues are important for all adults, regardless of marital status.

Research on how economic inequality affects the prospects for marriage among low- and middle-income Americans points to several equally telling trends. Economists Eric Gould at the Center for Economic Policy Research and Boston University’s M. Daniele Paserman detail that marriage rates fall in cities where wage inequality is highest. Economists Melissa S. Kearney at the University of Maryland and Phillip B Levine at Wellesley College find that the proportion of young women having children out of wedlock is greatest in cities with the highestincome inequality. And economist David S. Loughran at the Rand Corporation finds that rising male wage inequality explains 7 to 18 percent of the fall in marriage for white women between 1970 and 1990.

In short, growing economic uncertainty and wage stagnation among the bottom 90 percent of income earners means greater family instability.  Indeed, sociologists Kathryn Edin at Johns Hopkins University and Maria Kefalas at St. Joseph’s University find that the main reason unmarried women hesitate to marry—even if they have a stable partner—is because they see family economic instability and the fear of divorce as a bigger threat than being single. What’s more, Levine and Kearney also find that out-of-wedlock teen pregnancy is often driven by economic despair.

The release of yesterday’s AEI report by Lerman and Wilcox is a timely reminder that marriage matters amid the swift-changing economic landscape for most families in the United States, but we must also keep in mind that economic inequality plays a big role in the decline in marriages. Without question, families today are more financially and socially unstable than they were 40 years ago, when the rise of economic inequality to near Roaring Twenties-levels today first began. And this instability is now part of a feedback loop that makes it more likely for the next generation of American families to be even more stressed and increasingly not married.

But there are policies that those across the political spectrum can agree on—policies that could create  conditions that foster healthy relationships and family life.  Lerman and Wilcox’s paper provides an excellent starting place for a conversation about an economic policy agenda that supports strong and stable families. In particular, their recommendations regarding the expansion of the earned income tax credit and the child tax credit merit more attention because they have the potential to incentivize work and stabilize the economic lives of low- and middle-class Americans. Similarly, the recommendation to expand vocational education and apprenticeship opportunities for young Americans holds promise for strengthening the employment and earnings prospects of low and moderate income Americans, especially men.

Additional ideas belong on the table as well. A higher minimum wage would boost the take-home pay of millions of young workers. Policies to address work-life conflicts (especially for young parents) would provide much-needed stability for individuals seeking to establish and maintain healthy relationship with their partner. And reliable, high-quality early child-care, preschool, and after-care would remove a major stress from many family relationships.

Then there are health and criminal issues that need addressing. Providing easy access to effective and inexpensive contraception would help prevent unintended pregnancies, allowing couples to plan stable, secure family formation. Addressing the incarceration rate and the life-long consequences of imprisonment is a key point of policy intervention as well, particularly for low-income African-American men.

On both sides of the political aisle, there are signs of a commitment to the idea of strong, stable families as a critical element of our economy’s long-term success. Yesterday’s report suggests an opening for a policy agenda that could address this challenge head-on.

Suppose–Counterfactual World–That the U.S. Had Avoided Large-Scale QE since the Start of 2010…

Posted on by Brad DeLong

…and that the employment, inflation, and futuer breakeven outcomes realized in that counterfactual world had been those seen in our world:

Graph 10 Year Breakeven Inflation Rate FRED St Louis Fed Graph 10 Year Breakeven Inflation Rate FRED St Louis Fed Graph 10 Year Breakeven Inflation Rate FRED St Louis Fed

Is there any question that in that counterfactual world the FOMC would right now be actively and aggressively on the point of a massive QE program–that the only questions would be “how much” and “how quickly”?

Today, with the ending of QE, we live in that counterfactual world–with three differences:

  1. Since the start of 2010 the FOMC has already done $2.2 trillion of QE–and has thus taken duration risk of a magnitude that the private market requires $2 billion a month to bear off of private-sector balance sheets.

  2. As a result, whatever risks are involved in QE start from a baseline in which the private market is bearing $2 billion/month less in the amount of government and GSE duration risk than in the counterfactual world (modulus the Summers point that maturity extension has neutralized 1/3 of QE undertaken). And just what are those risks? And just how are they increased at the margin by starting with $2 billion/month less of government-issued duration risk in private-sector hands?

  3. As a result, whatever benefits are expected from QE have been modified by what we have learned over the past 4.75 years about the benefits of QE. And just what have we learned?

Question: How do those three differences move us from being on the point of undertaking a massive QE program to it being off the table?

Question: And why is the option of regime change–price-level targeting with at least partial catchup to the pre-2008 expected price level trend–off the table as well?

Graph 10 Year Breakeven Inflation Rate FRED St Louis Fed