The BEA made its advance GDP release for the fourth quarter of 2006. Real GDP grew at an annual rate of 3.5 percent, up from 2.0 percent in the third quarter. This is a respectable pace, though I wish more of what we were seeing were driven by investment rather than consumption. The personal savings rate remains negative.
Category: macroeconomics
Catching Up on the Basics
A reader e-mails with the following question:
I'm not sure I ever realized what interesting things happened at the intersection of economics and politics -- now I'm starting to wish I had taken some econ courses as an undergrad! Could you give me an idea of where I could start reading to play catch-up on some of the terminology and the basic principles of economics?
I think there are two places to start, outside of the textbook market. The classic answer to this question is Economics in One Lesson
A more recent book that has also been praised for its clarity and accessibility is Naked Economics
Q3 GDP Growth, Not So Much
The BEA's advance estimate of third quarter GDP growth came in at a 1.6 percent rate. Blessedly not the start of a recession but not a good omen, considering the declines in housing have accelerated and this number was bolstered by temporary increases in vehicle sales that are unlikely to persist. Key paragraphs from BEA:
The deceleration in real GDP growth in the third quarter primarily reflected an acceleration in imports, a downturn in private inventory investment, a larger decrease in residential fixed investment, and decelerations in PCE for services and in state and local government spending that were partly offset by upturns in PCE for durable goods, in equipment and software, and in federal government spending.
Final sales of computers contributed 0.10 percentage point to the third-quarter growth in real GDP after contributing 0.04 percentage point to the second-quarter growth. Motor vehicle output contributed 0.72 percentage point to the third-quarter growth in real GDP after subtracting 0.31 percentage point from the second-quarter growth.
For online commentary, go read the analysis by Nouriel "If you're gonna be a bear, be a grizzly" Roubini, who has been predicting this for a while.
Beyond the Headlines: Media Coverage of Economic Issues
On October 3, 2006, five national journalists were on the Dartmouth campus to discuss their work in covering economic and business news. Their visit included a public panel discussion titled "Beyond the Headlines" moderated by yours truly, in my capacity as director of Dartmouth's Rockefeller Center. Our guests were Peter Coy, Greg Ip, Steve Liesman, Eduardo Porter, and Andrew Serwer.
The panel discussed how economic and public policy issues are covered by the media, the public's understanding of these issues, and how these issues are likely to influence elections in the coming years. Panelists also described factors that impact the media's role in reporting these issues. Journalists also discussed new methods of communication and their impact on the future of traditional media in our rapidly changing environment influenced by technology.
You can watch the video here, courtesy of James Reese at RadioEconomics. Enjoy
Preliminary Q2 GDP
The BEA's preliminary GDP estimate for the second quarter is now out, showing real GDP growth at a 2.9 percent annual rate. According to the BEA:
The increase in real GDP in the second quarter primarily reflected positive contributions from personal consumption expenditures (PCE) for services, private inventory investment, nonresidential structures, exports, and state and local government spending that were partly offset by negative contributions from residential fixed investment and federal government spending. Imports, which are a subtraction in the calculation of GDP, increased.
Nothing surprising there--we are seeing a shift from residential and to nonresidential structures, and both exports and imports are growing.
The preliminary estimate is up 0.4 percent from July's advance estimate of a 2.5 percent rate. Again, according to the BEA:
The upward revision to the percentage change in real GDP primarily reflected upward revisions to exports of goods, to nonresidential structures, to private inventory investment, and to state and local government spending that were partly offset by a downward revision to residential fixed investment.
Hopefully, this will calm some of the fears of recession that emerged over the intervening month. Real growth over the last 4 quarters has been 3.6 percent. The final release is due September 28.
The Disconnect Between Terrorism and Economics
Robert Samuelson wonders why the economic impact of terrorism and its aftermath has been so small:
To be sure, terrorism has exacted some steep costs. Airlines and tourism suffered after Sept. 11; in the wake of last week's foiled bomb plot, that could happen again. Spending for the war in Iraq was vastly underestimated. But terrorism's damage has paled before the larger effect, which is not much. It hasn't destroyed prosperity or cross-border flows of goods, money and people.
Since 2001 the world economy has expanded more than 20 percent. For the United States, the gain is almost 15 percent; for developing countries, more than 30 percent. World trade -- exports and imports -- has risen by more than 30 percent. Outstanding international debt securities have jumped almost 90 percent, to $13.6 trillion (through the third quarter of 2005).
The figures are interesting, but the question is misplaced, for (at least) two reasons.
First, there is an issue of scale. Think of the total impact as the product of (number of terrorists) x (damage per terrorist). The product is small because the number of terrorists who are specifically looking to do damage to us outside of our presence in the Middle East is very small--small enough to overcome the fairly large amount of damage each terrorist can do. In their propaganda war, the terrorists market themselves based not on total damage, but on the sensational amount of damage that they can do with such a small presence (i.e., not that they hit every key building in New York, just that they were able to hit the most symbolic ones).
Second, the terrorists do not appear to have the reduction of prosperity, commerce, or international trade as their key objectives. If they did, they wouldn't focus their attention primarily on the U.S., Western Europe, and Israel. They would expand their reach to other major economies, like India and China. They also wouldn't be so fixated on passenger air travel--they would expand their reach to international shipping, for example. And perhaps most importantly, they would focus their attention on key strategic, as opposed to symbolic, assets: ports, bridges, and tunnels.
If the terrorists changed their focus, or if they recruited more people willing and able to die for their cause, they could do a lot more economic damage.
Signs of a Softening Economy
From today's report on WSJ.com's economic forecasting survey:
This month's WSJ.com economic forecasting survey showed projections for gross domestic product and employment growth were cut, while forecasts for consumer prices and oil prices were lifted. Economists continued to nudge higher their estimates of the probability of a recession over the next 12 months; on average, they put the likelihood at 26%, up from 20% in June and just 15% in February.
Economists, on average, forecast GDP growth at a 2.8% annual rate for the third quarter, the first time their forecast for that quarter has been under 3% since the economic forecasting survey first asked about the period in November 2005. While their forecast is slightly above the 2.5% real GDP growth recorded in the second quarter, it is well below the 5.6% growth in the first quarter and average annual growth rate of 3.2% from 2003 to 2005. The economists forecast growth slowing to a 2.6% rate in the fourth quarter, and staying at that rate for the first half of 2007. GDP is the broadest measure of economic output.
"The economy has definitely slowed below trend," said Ethan Harris at Lehman Brothers. "Second quarter GDP is soft, employment numbers are coming in soft and the housing market is finally softening."
Hard to argue with that. The question for me is whether we can get any increase in exports or non-residential investment to stem the losses.
For a discussion of the role that higher oil prices may play in the risk of recession, see this Econoblog by Stephen Brown and James Hamilton.
A Trifecta at the Big Picture
Barry Ritholtz of The Big Picture provides some of the very best real-time commentary on the macroeconomy. He offers up three excellent posts today on the release of the July employment figures. The top line number came in at 113,000 net new payroll jobs, with the unemployment rate moving up to 4.8 percent.
In "NFP: Final Piece in Fed Puzzle?" he suggests that the Fed will likely stop its rate increases by September, if not with the next meeting. More interestingly, he provides the explanation for why I have never been interested in the high-frequency activities at the Fed:
All the teeth gnashing over a 1/4 point hike -- is there THAT much difference between 5.5% or 5.25%? I find it quite telling, as it reveals how fragile this recovery actually is. A robust economy with strong job growth and healthy organic expansion wouldn't care a whit about a 5.5% Fed funds rate. Yet the markets have been wailing about the Fed as if they had Bernanke's boot on their collective throats.
This is quite true. A quarter of a point shouldn't really be of such profound interest in the market. It certainly isn't in my book.
In "Where are the Household survey Bulls?" he points out that normally, when we have a weak showing in the payroll (or establishment) survey, those who like to be cheerleaders point to a possibly different outcome in the labor market talk up the unemployment rate (which is fine) or the employment number from the household survey (not fine). Well, this month, the unemployment rate increased. So where are the opportunists this month?
And, finally, in "Where are the bodies? In line at Unemployment," he makes an interesting case for supplementing our monthly news from the payroll and household surveys with weekly news from the Unemployment Insurance Weekly Claims Report. These data pertain to insured (not total) unemployment, the difference being that not everyone who is unemployed is eligible for unemployment insurance. Picking up on a report by Paul Kasriel of Northern Trust, he considers the year-over-year change in initial claims for unemployment insurance. The rationale is as follows:
[T]he recent behavior of initial jobless claims clears up some ambiguity about the interpretation of the weaker payroll growth of the past three months. Some have hypothesized that the recent weak payroll numbers are a result of a shortage of employable bodies rather than slower demand for those bodies. If that were the case, we would expect that employers would be firing considerably fewer employees now than they were a year ago. In fact, they are firing about the same number each week.
Presumably, one could find more detailed information, with a two month lag, at the Job Openings and Labor Turnover Survey.
Second Quarter GDP
The BEA gives us our "advance" estimates of second quarter GDP growth. Real GDP grew at a 2.5 percent annual rate. Over the last four quarters, the real GDP growth rate has averaged 3.5 percent, which is at or a bit above what I think most economists would consider its potential growth rate.
Revisions to prior years lowered GDP growth rates by 0.2-0.3 percentage points in each of 2003, 2004, and 2005. Overall, GDP growth over the 2002-2005 period averaged 2.8 percent according to the revised figures.
To me, the big news continues to be the negative personal saving rate. Quoting from the release:
Personal saving -- disposable personal income less personal outlays -- was a negative $141.0 billion in the second quarter, compared with a negative $97.0 billion in the first. The personal saving rate -- saving as a percentage of disposable personal income -- decreased from a negative 1.0 percent in the first quarter to a negative 1.5 percent in the second. Saving from current income may be near zero or negative when outlays are financed by borrowing (including borrowing financed through credit cards or home equity loans), by selling investments or other assets, or by using savings from previous periods.
In what is still the healthy part of the business cycle, I see no good reason why the personal sector should be running down its assets to support consumption.
Real Earnings, Not So Much
The BLS released the May CPI report and the associated Real Earnings report. The news is not pretty.
The former reports that the CPI (CPI-U) rose by 5.2 percent at a seasonally adjusted annual rate in the first 5 months of the year of the year. It is not all energy costs--the CPI excluding food (another volatile sector) and energy rose at a 3.1 percent rate during that period. Even the lower number, if it reflected the whole index, should be enough to incline the Fed toward continued rate increases (spoken by a novice Fed watcher). Over the twelve months ended in May, the two indexes are up 4.2 and 2.4 percent, respectively.
But I've never been one to spend a lot of time thinking about inflation per se. What matters to me is whether the price level has risen relative to other macro variables, like compensation. The second report tells us that:
Real average weekly earnings fell by 0.7 percent from April to May after seasonal adjustment, according to preliminary data released today by the Bureau of Labor Statistics of the U.S. Department of Labor. A 0.3 percent decline in average weekly hours and a 0.5 percent increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) were partially offset by a 0.1 percent rise in average hourly earnings.
And the failure for real earnings to advance is evident in every major sector, as shown in this table (focus on the bottom panel, so that the impact of declining hours is reflected). There isn't a single broad industry group where the real average weekly earnings have risen more than 0.8 percent over the past year, and all but two are actually negative.
This isn't the entire workforce--only the 80 percent or so who are production or non-supervisory workers on private, nonfarm payrolls. It isn't total income--just the (pre-tax) earnings component of it. It isn't the whole economy--just the returns to this segment of the labor market. But it isn't good.