This morning, the BEA released the Advance Estimate of GDP for 2015, and boy is it disappointing. Keep in mind that this estimate is early and will be revised over the next few months. But still, 0.7% growth for the fourth quarter is positively pedestrian. In addition, with all four quarters now in, the overall growth rate of real GDP for 2015 is estimated at just 2.4%. Yuck. These are the kinds of numbers that give fodder to those who think we are headed toward a recession.
The graph below shows quarterly growth rates since 2005. As you can see, only the second quarter was above the long run average of 3 percent.
Finally, the table below shows the contribution to the overall 2015 growth rate from each of the four types of spending: consumption, investment, government, and net exports.
I certainly hope that these figures are revised upward over the next few months. In the immediate future, I'll be very curious to see the jobs report from the BLS next week.
Should we ditch macroeconomics or perhaps reduce it to two weeks? In a recent blog post, Noah Smith argues that most of the material in a Principles of Macroeconomics class isn’t really necessary. After teaching macro principles to more than 1,000 students per year since 2003, it is easy for me to find the blind spots in Noah’s view. More than anything, it is pretty clear that Noah doesn’t spend much time with college students.
Let me start with what Noah gets right: students should learn the Solow model for long-run growth, and the AD-AS model for business cycle analysis. He also includes “the standard Milton Friedman, New Keynesian, AD-AS, accelerationist Phillips Curve theory of monetary policy.”
Now we come to Noah’s first howler: he believes that this material should take “about two weeks.” Two? What students is he teaching? I teach at the University of Virginia, a really great university with super students. But this takes six weeks, not two. When my students show up for macro principles, very few even know that interest rates are market prices. I do teach the Solow model but most Macro principles instructors believe it is just too hard for the intro level.
More than that, Noah leaves out a host of other macro topics that students need to learn at the intro level, whether they continue in economics or not. This list includes:
1. Key macroeconomic variables. These need to be defined, explained, and put in their proper historical perspective. These include real GDP growth, unemployment, inflation, and interest rates. And not just for the United States.
First off, the way we measure these variables actually matters. Consider that unemployment rates do not include underemployed or out-of-labor force workers. Or that GDP only includes market goods. Both of these are relevant for policy and have been discussed in the media recently. And historical perspective is really key here – it can be one of the best gifts you can give your students. What is a big number or a small number? When unemployment is 7%, is that high or low? How about in the U.S. versus Spain? Or when real GDP grows by 4%, is that high or low? How about the U.S. versus Mainland China? Most college students won’t know this without a macro principles course.
2. The loanable funds market. You can’t understand financial collapse/contagion without a good understanding of the loanable funds market. A big part of this discussion is also forming an intuitive understanding of interest rates, which is not natural for most students. In my principles course (and textbook) I even cover mortgage-backed securities, securitization and moral hazard now so that the students understand the Great Recession.
3. Fiscal and monetary policy. In many universities, this is the one place where real economic policy is taught - Intermediate Macroeconomics typically focuses on theoretical models. I view these policy discussions as voter education curriculum. Students need to know what deficits mean and something about historical perspective here too. They also need to know where government revenue comes from and how it is spent. Hint: it’s not all spent on foreign aid and welfare! And what about the Fed? This is the course where students learn about Fed policy and both actual and perceived effects on the economy.
If time permits, it is great to also throw in international trade and finance, like the balance of payments (many misconceptions arise from a misunderstanding of how capital inflows are related to merchandise trade).
Basically, to cover all of this takes about a semester. It is foolish to think that two weeks is enough.
By the way, my favorite macro textbook covers all of these topics clearly in a great one-semester format.
The latest GDP release from the BEA estimates that U.S.real GDP grew at 1.5% in the third quarter of 2015. This is just a mediocre growth rate but revisions to second quarter data have now increased the final growth estimate to a robust 3.9 percent.
Recall that inventory is part of investment expenditures in GDP. In the second quarter, private inventories fell by 1.44%. This drop was the biggest negative of the major pieces of GDP. In total, investment fell by about 1% in the third quarter. The table below shows how the four major pieces of GDP each contributed to third quarter growth.
Today, the BEA released their first (Advance) GDP estimate for the second quarter of 2015, estimating real GDP growth of 2.3%. These figures will be revised over the next few months, but for now, they indicate positive but pedestrian growth below the long-run historical average of 3%. The graph below shows quarterly real GDP growth since the beginning of 2004.
The big news is that the growth estimates for the first quarter of this year were revised up to +0.6% from -0.2%. This means that the economy has had positive growth now for over a year.
The table below shows the contributions of each of the four major pieces of GDP:
Real GDP grew 3.5% in the third quarter, according to the advance estimate released by the BEA.
A big piece of the growth came from net exports (exports minus imports). Exports rose by 7.8% and imports fell by 2.4%. Since net exports makes up a very small piece of total GDP, this contributed 1.3% to real GDP growth, but this is more than a third of the total growth in the third quarter.
Here is a complete breakdown in the growth contribution from each of the four major components:
Overall, 3.5% is a solid growth rate, assuming this estimate holds up through revisions over the next three months. However, it is slower that the growth experienced in the second quarter, which was 4.6 percent. One big difference between the last two quarters is in investment which contributed just 0.2% to third quarter growth but contributed 2.9% in the second quarter.
The BEA now estimates that real GDP grew by 4.6% in the second quarter. This revision means that the most recent quarter saw the fastest real GDP growth since 2006. That's a long time. Before we get too excited, let's remember that this comes on the heels of negative growth in the first quarter.
The growth was driven largely by changes in investment, which grew by $115.5 billion, or 19.1 percent on an annual basis.
Those who follow me on Twitter may recall that, back on July 3, I predicted that second quarter growth would come in at "something like 5 percent." My rationale was that the negative first quarter growth was likely due to short run supply factors associated with the polar vortex. After all, the unemployment rate fell consistently throughout the spring. Even a blind squirrel finds a nut once in a while.
The third (and final) GDP estimate for the third quarter revised growth up yet again, this time to 4.1%. This figure indicates that growth was stronger in the third quarter than at any time since the end of 2011. The graph below shows quarterly growth rates since 2003.
Notice that 4.1% is larger than all but one quarter since before the Great Recession. These are the kinds of growth rates we need if the economy is to truly recover from the Great Recession. Finally, the revisions indicate that more of the growth came from consumption than previously thought. The table below shows how each of the four categories of GDP spending contributed to overall growth.
The latest jobs report shows the unemployment rate dropped to 7.0% in November, the lowest level in five years. In addition, the economy added 203,000 more jobs.
The last time the unemployment rate was this low was in the worst period of the Great Recession. During the fourth quarter of 2008, the unemployment rate climbed from 6.1% to 7.3%, on its way to 10% by the end of 2009. During 2009's bleak fourth quarter, real GDP contracted by more than 8%.