Macroeconomics – Page 9

Still Broad Weakness in Q2 GDP

Earlier today, the Bureau of Economic Analysis released updated GDP figures, estimating that the economy contracted at a 0.7% pace in the second quarter. The BEA’s well-named “third estimate” thus indicated that the decline in the second quarter was somewhat slower than the 1.0% BEA had previously estimated.

As I mentioned a couple of months ago, whenever the GDP data come out, the first thing I look at is Table 2, which shows how much different sectors of the economy contributed to the growth (or, in this case, the decline). Even with the small upward revision, the most striking thing about Q2 continues to be how broad the weakness was:

Broad Weakness in Q2 GDP (Third)

As the chart shows, Q2 witnessed declines in every major category of private demand: consumer spending, residential investment, business investment in equipment and software (E&S), business investment in structures, and exports. Wow. To find the last time that happened, you have to go all the way back to … the fourth quarter of last year, when it was even more severe. But before that, you have to go back five decades to the sharp downturn of the late 1950s.

Not surprisingly, government spending helped offset the declines in private spending. Most of the boost came from defense spending (a contribution of 0.7 percentage points), but state and local investment also helped (adding 0.48 percentage points, presumably at least in part due to stimulus spending).

A sharp decline in imports, finally, was the biggest contributor to growth in Q2, at least in an accounting sense. As I’ve noted before, it’s important to choose your words carefully here, since declining imports are clearly not the path to prosperity. In a GDP accounting sense, however, import declines do boost measured growth. Why? Well consider the fall in consumer spending. That decline affected both domestic production and imports. GDP measures domestic production, so we need a way to net out the decline in consumer spending that was attributable to imports. That’s one of the factors being captured in the imports figure.

Note: If the idea of contributions to GDP growth is new to you, here’s a quick primer on how to understand these figures. Consumer spending makes up about 70% of the economy. Consumer spending fell at a 0.9% pace in the second quarter. Putting those figures together, we say that consumer spending contributed about -0.6 percentage points (70% x -0.9%, allowing for some rounding) to second quarter growth.

IMF: The Lasting Effects of Financial Crises

Earlier this week, the IMF released a key chapter from the upcoming World Economic Outlook: Chapter 4: What’s the Damage? Medium-Term Output Dynamics After Financial Crises. As noted in the much pithier summary, the report concludes that:

The global financial crisis is likely to leave long-lasting scars on the world economy, but governments can act to stimulate a quicker revival and counter output losses … . The study finds that banking crises typically have a long-lasting impact on the level of output, although growth eventually recovers. Lower employment, investment, and productivity all contribute to sustained output losses.

Those conclusions are based on their review of financial crises around the world since the early 1970s. As shown in the following graph, the key finding is that after a financial crisis economic output remains below trend for years:

The blue line shows, for example, that in the average country, output seven years after the crisis was about 10% below what would it would have been if the pre-crisis growth rate had continued.

The dotted red lines, however, highlight the enormous range of outcomes. At least one-quarter of the countries eventually had output that was above the level implied by the earlier trend; while another quarter eventually fell at least 25% below the prior trend.

The study slices and dices this result in numerous ways, trying to identify the factors that lead to better or worse outcomes. Some are bad news for the United States.

Continue reading “IMF: The Lasting Effects of Financial Crises”

How Much Did Cash-for-Clunkers Boost Auto Sales?

The busy folks at the Council of Economic Advisers (CEA) released a quartet of studies today, covering the economic impacts of:

I suspect that other bloggers (not to mention the regular media) will have lots to say on the stimulus analyses, so I started my reading with the clunkers piece, which I found quite interesting.

News accounts often describe the program as a success because almost 700,000 people participated in it in just a few weeks. But, as CEA emphasizes in their new study, the fact that someone participated in the program does not necessarily mean that they bought a car because of it. Indeed, CEA estimates that the 690,000 auto sales under the program boosted 2009 auto sales by only 330,000:

What about the other 360,000?

Continue reading “How Much Did Cash-for-Clunkers Boost Auto Sales?”

Why Economists Messed Up

The biggest thing in economics today is Paul Krugman’s “How Did Economists Get It So Wrong?” in the New York Times Magazine. If you have any interest in macroeconomic policy, you should read it.

For one thing, the illustrations by Jason Lutes are quite entertaining:

More important, though, is Paul’s evaluation of how we economists missed the 800-pound gorilla in the room. He fingers three suspects:

Mistaking beauty for truth. I.e., too much reliance on elegant, solvable, mathematical models in which economic players are rational and markets adjust to shocks easily. These models are a joy to play with — and provide important insights — but they miss messy truths about the actual economy.

Excess confidence in financial markets. He argues that widespread acceptance of the efficient markets hypothesis (the idea that asset prices incorporate all information and thus get prices “right”) left us blind to the risks of asset bubbles.

The limits of mainstream macroeconomics. This critique is harder to summarize, but in a nutshell he argues that (a) some economists have (incorrectly) embraced the classical view that the government can’t and shouldn’t try to moderate the business cycle and (b) the larger body of mainstream of economists have (correctly) embraced the Keynesian view that the government can try to moderate the business cycle but have (incorrectly) concluded that the Federal Reserve is the only appropriate tool to do so.

I think each of these charges has merit, with one caveat. Back in graduate school, I was indeed taught that monetary policy was the preferred tool for addressing economic weakness (e.g., because of policy lags and concerns about the political economy of what passes as fiscal stimulus from the Congress). In my years in Washington, however, I have met many economists, of the left, right, and center, who believe in fiscal policy as well. Indeed, in policy circles, the idea of fiscal stimulus was active in 2001, 2003, 2008, and 2009, each of which witnessed tax cuts (and, in the most recent case, spending increases) that were partly or wholly passed in the name of stimulus. One can debate the merits of those acts, but the concept of fiscal stimulus has been alive and kicking.

Paul’s recommendations for the way forward for economists:

First, they have to face up to the inconvenient reality that financial markets fall far short of perfection, that they are subject to extraordinary delusions and the madness of crowds. Second, they have to admit — and this will be very hard for the people who giggled and whispered over Keynes — that Keynesian economics remains the best framework we have for making sense of recessions and depressions. Third, they’ll have to do their best to incorporate the realities of finance into macroeconomics.

On his final point, I should note that one of the leading thinkers on the links between finance and macro is none other than Ben Bernanke, current (and, one hopes, future) chairman of the Federal Reserve. That’s one of the reasons he’s the right person for the job.

Related commentary: EconomistMom, Barry Ritholz, Paul Kedrosky, Brad DeLong, and Paul Krugman himself.

More Stimulus Spending Than Originally Projected

Lots of budget news this morning, with the release of the newest projections from the Office of Management and Budget and the Congressional Budget Office.

One headline is that spending on the stimulus will be higher than expected. As reported by Lori Montgomery at the Washington Post (ht EconomistMom):

The $787 billion economic stimulus package President Obama signed earlier this year is likely to cost “tens of billions of dollars” more than expected, helping to drive projections for next year’s budget deficit to $1.5 trillion, White House budget director Peter Orszag told reporters.

With unemployment climbing, costs for a variety of stimulus programs are running higher than anticipated, Orszag said, including expanded unemployment benefits, food stamps and energy grants. In an interview embargoed for release Tuesday morning, Orszag said he could not estimate the overall cost of the package, but he called Republican estimates of $900 billion “slightly high.”

The $900 billion estimate that Peter mentions is reported in this letter from former CBO Director Doug Holtz-Eakin to Republican House Leader John Boehner.

The CBO also addresses this issue in its report (box on pp. 10-11). The box discusses lots of pesky nuances about budget accounting and the timing of payments. Perhaps the most interesting observation, consistent with the OMB quote above, is that:

The higher-than-expected unemployment rate has led CBO to raise its estimates of spending in 2009 for ARRA [i.e., stimulus] provisions that affect unemployment compensation (by $7 billion) and Medicaid (by $1 billion).

In other words, the weaker economy has added $8 billion to stimulus spending in fiscal 2009 alone with, presumably, more to come in fiscal 2010.

These developments further complicate the challenging task of tracking the stimulus.

Step Two of a Housing Bottom?

Yesterday’s report on residential construction provided more evidence that step one of a housing bottom is underway — and that step two may be beginning.

Total housing starts fell slightly in July because of weakness in multi-family. But starts of single-family homes increased to 490 thousand (at an annual rate), the fifth straight monthly increase and the highest level since last October.

As the chart shows, this rebound is off of extremely low levels, so we shouldn’t get too excited. But it does appear that single-family starts bottomed last January and February (at 357 thousand).

That’s the first step of a housing bottom.

As I’ve noted in previous posts, however, that isn’t enough to declare a bottom in housing activity. Housing activity depends on the number of houses under construction, which depends on both housing starts and housing completions. Completions have exceeded starts for more than three years. As a result, the number of houses under construction has fallen for 41 straight months.

For me, the big news in the July data is that this decline may be ending.

Continue reading “Step Two of a Housing Bottom?”

Tracking the Stimulus

In her recent speech about the impact of the stimulus effort, Christina Romer, Chair of the President’s Council of Economic Advisers, noted that “as of the end of June, more than $100 billion had been spent.”

If you visit the government web site tracking the stimulus (Recovery.gov), however, it will tell you that the government had paid out only about $60 billion by July 3. (You can find this figure in the chart at the lower right hand corner of the home page.)

Why does Christi report a figure so much larger than the one reported on the official website? Because Recovery.gov isn’t tracking all of the budget effects of the stimulus.

Christi’s figure includes the $60 billion of spending reported on Recovery.gov plus an internal estimate, prepared by Treasury, of the tax reductions resulting from the stimulus effort through June 24. Those tax reductions are obviously a big deal, totaling $40 billion or slightly more through the end of June.

Based on conversations with friends and journalists, I get the sense that some users of Recovery.gov do not realize that its figures cover only the spending side of the stimulus story, not the tax side.

As a result, I think Recovery.gov is (unintentionally) confusing people into thinking that the stimulus effort to date is smaller than it has actually been.

I have two suggestions for how to fix this:

Step 1: Reduce Confusion: Recovery.gov should slap a warning label on the home page chart (and everywhere else it reports aggregate figures) that says something like: “These figures reflect only the new Federal spending that has resulted from the recovery act. The act also included significant tax reductions that aren’t reflected here.”

Step 2: Provide the Information: Of course, it would be even better if Treasury would release official estimates of the week-by-week or month-by-month tax reductions flowing from the recovery act. These figures would obviously be estimates — and thus not able to be audited to the same degree as the spending programs — but would be invaluable to analysts trying to track the impact of the stimulus effort.

P.S. As I noted last week, the Congressional Budget Office recently estimated that the total budget impact of the stimulus effort reached about $125 billion through the end of July.

Google Is Still Wrong About Unemployment

Everyone who follows the U.S. economy closely knows that the unemployment rate was 9.4% in July, down 0.1% from June.

Everyone, that is, except Google.

If you ask Google (by searching for “unemployment rate United States“), it will tell you the unemployment rate in July was 9.7%.

What’s going on? Well, it turns out that Google is directing users to the wrong data series. As I discussed last month, almost everyone who talks about unemployment is using (whether they know it or not) data that have been adjusted to remove known seasonal patterns in hiring and layoffs (e.g., many school teachers become unemployed in June and reemployed in August or September). Adjusting for such seasonal patterns is standard protocol because it makes it easier for data users to extract signals from the noisy movements in data over time.

For unknown reasons, Google has chosen not to direct users to these data. Instead, Google reports data that haven’t been seasonally adjusted and thus do not match what most of the world is using.

This is troubling, since I have high hopes for Google’s vision of bringing the power of search to data sets. The ability of users to find and access data lags far behind their ability to find and access text. I am hopeful that Google will solve part of this problem.

But data search is not about mindlessly pointing users to data series. You need to make sure that users get directed to the right data series. So far, Google is failing on that front, at least with unemployment data.

P.S. As I discussed in a follow-up post last month, Wofram Alpha has an even more ambitious vision for making data — and computation — available through search. I like many of the things Alpha is trying to do, but they are lagging behind Google in several ways. For example, as I write this, they haven’t updated the unemployment data yet to reflect the new July data. (Click here for Alpha results.)

Bing isn’t trying yet.

Latest Data on Transfers and Income

In a series of posts (most recent here), I’ve documented that Americans are getting an increasing portion of their income from the government.

BEA released new data on incomes a couple weeks ago, including revisions back to 1995. These data reinforce the story I’ve described in my previous posts:

Transfers accounted for 17.3% of personal income in June. That’s the second highest in history, topped only by the 18.2% recorded in May, when transfers were boosted by one-time payments from this year’s stimulus act:

The increasing importance of transfers reflects both short-run developments and long-run trends. In the past year, the importance of transfers has grown because of (a) weakness in other forms of income, (b) the natural expansion of transfers due to economic weakness (e.g., increases in unemployment insurance payments), and (c) policies to expand benefits (e.g., as an attempt at stimulus). Over the longer run, however, the growth of transfers has been driven by the expansion of entitlement programs.

Continue reading “Latest Data on Transfers and Income”

Inflation, Bank Reserves, and Lending

The Business News Network in Canada interviewed me last week about the gigantic amount of excess reserves being held by U.S. banks.

Here’s a link to the video of the interview. (We had a small technical glitch at the start, but then got rolling.)

Going into the interview, I was focused on the following talking points:

Total bank reserves have skyrocketed over the past year, from roughly $50 billion to roughly $850 billion.
When we studied economics in school, we were usually taught that a big increase in reserves would eventually translate into big inflation.
However, that’s not true today, for two reasons: (1) short-term interest rates are effectively zero, and (2) the Fed can now pay interest on reserves. Those facts weaken / break the traditional link between reserves and inflationary pressures.
Some have wondered whether the excess reserves mean that banks are hoarding, rather than lending.
That’s not true either. Instead, the high level of reserves simply reflects the fact that the Fed has been a busy beaver, expanding its balance sheet by making loans and buying securities (i.e., credit easing). Banks might be hoarding or they might not; excess reserves don’t shed any light on the question.
Viewers who are interested in these issues should check out a recent paper from the New York Federal Reserve, which does a great job of explaining each of these issues.

I didn’t manage to get all of that into the interview, of course, but I tried to hit some of the high points.