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December 2014

Gas Prices Drops Lead to Overall Deflation in November

Gasoline prices dropped another 6.6% in November, bringing the year-over-year decline to 10.5 percent.  And since the average U.S. consumer spends almost five percent of their budget on gasoline alone, the price drop helped pull the overall consumer price index (CPI) down by 0.3% in November. 
In the past year, inflation, as measured by growth in the the CPI, has been just 1.3%.

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We can dig further into the price report to see changes in prices of particular goods.  For example, the price of cookies increased by 1.8% in November. However, the price of flour and prepared flour mixes declined by 2.7%, so you might consider baking your own cookies.

As usual, I also give you a few selected goods that have had both significant price rises and significant price falls (in the table below).

Inflation 12-17-14

According to the Energy Information Administration, the national average gas price is now at its lowest level since December 2008.  That certainly makes it cheaper to drive home for the holidays.



Sex, Drugs and GDP in Europe

In September,  Eurostat waved a magic wand and increased the GDP in the European Union by 3.53 percent overnight. That is a full year's worth of very solid growth.  But it didn't make Europeans any wealthier because it was actually just due to a new definition of the way GDP is counted.  Eurostat (the economic statistics office of the European Commission) redefined GDP to include many transactions that were previously uncounted and are actually illegal across much of the Eurozone.
The new GDP definition includes illegal drug deals, prostitution, and even sales of stolen goods. Specifically, it includes illegal transactions as long as both parties agree to the transaction.
European-cannabis-lawsOstensibly, Eurostat is trying to capture part of the shadow economy that is typically not measured in GDP.  This makes sense, right? GDP is supposed to measure the output of final goods and services, so shouldn't we include all final goods and services even if the service is illegal?  In addition, this is complicated when the legality of goods and services varies across nations.  For example, the map to the right (from Wikimedia Commons) shows how cannabis laws vary across Europe - cannabis is essentially legal in some nations like the Netherlands but strictly illegal in others like France. 
So, normalizing the accounting standards across nations makes sense. But these illegal activities are difficult to measure.  In addition, if the illegal activities are a relatively stable portion of GDP, then there is really no bias when they are not included.  In fact, the new estimates, in an attempt to provide a more complete measure, may actually introduce more error into GDP measurement due to the difficulty of estimating illegal trade.  
So why the change in definition? There is another, perhaps insincere rationale: the new GDP measurements are a bit of an accounting trick to help nations lower their deficit to GDP ratios.  Many European nations are dealing with high deficit (and debt) to GDP ratios. The European Commission has explicit rules regarding these budget measures: a nation's deficit in a given fiscal year is not to exceed 3% of  their GDP, and the national debt is not to exceed 60% of GDP.  When nations exceed these bounds, the Council is directed to bring coercive measures called Excessive Deficit Procedures (EDRs). The Council has certainly been lax in enforcing these EDRs in recent years.  However, increasing GDP by simply redefining how it is measured automatically lowers deficit and debt ratios and helps nations with higher government debt levels. 
The figure below shows the effect of the new GDP definition on the GDP level each nation in 2013 (along with the overall EU and Euroarea).  The countries are ordered according to their GDP gains from the ESA 2010.
GDP percentage change ESA 10 mac
As you can see, GDP for Cyprus jumped 9.8% exclusively due to this accounting change.  This re-definition of GDP then shrank the debt-to-GDP ratio in Cyprus by a full half of a percentage point in 2013 - reducing it from 5.4% to 4.9%.  Therefore, this accounting rule change exaggerates any debt reduction in Cyprus, as they (hopefully) move closer to the EU goal of 3 percent.
So while new GDP accounting rules in Europe may normalize national income accounting across the continent, they are particularly helpful to those nations that already have high government debt levels.

Jobs Growth Continues

The U.S. economy added 321,000 new jobs in november, extending the streak of positive jobs growth to fifty straight months.  So far in 2014, nonfarm employment has grown by 2.65 million jobs or 221,000 jobs per month.

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As they are studying for finals, students might like to know which subjects relate to industries that have recently experienced significant jobs growth.  For example, 86,000 jobs were added in professional and business services in November alone, while the previous 12 month average was 57,000 jobs per month. Digging further, there were 16,000 in accounting and bookkeeping alone. So any students struggling to find incentives to study for accounting exams need just consider the job prospects waiting for them.  Another career path to consider might be health care, which added 37,200 jobs in November.

Unfortunately, all this jobs growth did not reduce the unemployment rate, which remained steady at 5.8 percent.

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