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December 2013
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February 2014

January 2014

The GDP Report in 3 Graphics

Real GDP grew at 3.2% in the fourth quarter of 2013, according to the first estimate released by the BEA this week. This news is decidedly... not terrible.  You could spin it to be good news or just mediocre news.  But, assuming the estimate doesn't change much in subsequent revisions, we've now had two solid quarters of growth.

The first graphic shows real GDP growth since 2003, by quarter.  Recession periods are shaded and the dashed line shows the long-run average of 3%.  For the year 2013, real GDP grew at 1.9%. Though this isn't too impressive, it's understandably driven by poor performance in the first quarter.


The second graphic shows the long-run path of real GDP, going back 50 years.


Finally, we can zoom in on real GDP over the past twenty years along with a trend line.  This graphic clarifies the mediocre nature of growth in the wake of the Great Recession.  At some point, we hope that growth can restore GDP to the long-run trend line.  There just hasn't been any bounce coming out of that last recession.


Keep in mind, this is just the first estimate for 2013 GDP and subsequent revisions can be significant.

Marijuana and the Money Multiplier

Half of the U.S. states have now decriminalized or legalized marijuana for medicinal or recreational uses.  However, as Serge Kovaleski reports in The New York Times, legal marijuana businesses in these states cannot open bank accounts to store their funds, or offer credit and debit card transactions.  So, for now, all transactions are in cash (currency).

Banks are reluctant to open accounts for marijuana businesses because they fear federal government laws.  That's right: it's still a federal crime to sell, possess or use marijuana. 

According to Kovaleski:

The limitations have created unique burdens for legal marijuana business owners. They pay employees with envelopes of cash. They haul Chipotle and Nordstrom bags containing thousands of dollars in $10 and $20 bills to supermarkets to buy money orders. When they are able to open bank accounts — often under false pretenses — many have taken to storing money in Tupperware containers filled with air fresheners to mask the smell of marijuana.

So what does this have to do with macroeconomics?  Currency held outside the banking system reduces the money multiplier and, all else equal, leads to a lower quantity of money in the economy. 

Oh dear, will this cause another economic contraction? No.

Kovaleski reports that the legal marijuana industry expects revenues of $3 billion this year. And, while that is a lot of cash, it is very, VERY small in comparison to the U.S. money supply, which is currently around $11 trillion (M2).  The money supply might fall (see chapter 17 in our macro text), but not by nearly enough to affect the overall economy.

Well Done, Ben Bernanke

Ben Bernanke is serving his last week as the Chair of the Federal Reserve and will be replaced by Janet Yellen on February 1st, which makes this a good time to consider his track record.

I agree with Kevin Grier (aka Angus), who praises Bernanke for avoiding both financial catastrophe and inflation.  Ben considers the monetary authority to be limited in its ability to manage the macroeconomy.  He sees the Fed's power as limited to two functions:

  1. Controlling inflation
  2. Providing ample money in times of crisis

The data shows that Bernanke was successful in both endeavors. 

First, inflation averaged just 2.2% during Bernanke's tenure (see figure below), lower than any of his predecessors since the 1970s.  Ben is probably not unhappy with this result. 


Second, Bernanke made sure there was plenty of liquidity in markets during the darkest days of the Great Recession and the recovery, even when this involved creating a new tool (quantitative easing) and figuring out how to use it, all without causing inflation.  Tough job.

Wait, this is bad news?

The jobs report released last Friday by the BLS reported a drop in the unemployment rate in December from 7% to 6.7%.  The decline is pictured below.


Sounds like really great news, right?  After all, the unemployment rate hasn't been this low in five years!

Still, here are the reactionary headlines in the financial news media:

The financial media got this one right.  Overall, the jobs report brought very bad news.  To understand why, we need to dig a little deeper into the report and reiterate how the unemployment rate is calculated.

First, let's look at another statistic: new jobs created.  Over the past four years, the U.S. economy has added about 130,000 jobs per month.  In December, the number was just 74,000 (see figure below).  This is particularly concerning in an economy that is still recovery from a tough recession.


Yet, even with slower jobs growth, why did the unemployment rate drop so much?  The answer offers a good lesson in how the unemployment rate is calculated.  The unemployment rate is the portion of the labor force that is unemployed.  But in December, the labor force contracted by 347,000.  This. Is. Bad. News. The primary reason the unemployment rate fell is because many people left the labor force, not because they got jobs. This decline in the labor force means that the labor force participation rate is down to 62.8% and hasn't been lower since 1977.

So this is certainly not a positive economic report.  On the other hand, it is only one report and these numbers are difficult to estimate accurately every single month.  Let's hope this month looks significantly better.

Summing up the December jobs report:

  1. The unemployment rate fell to 6.7%, the lowest level in 5 years, but...
  2. Nonfarm employment grew by just 74,000, well off the recent pace, and...
  3. Labor force dropped by 347,000, and this means...
  4. Labor force participation rate fell to 62.8%, the lowest level since 1977.