New data from the Bureau of Economic Analysis (BEA) today shows positive real GDP growth in the first quarter of 2023. The BEA estimates that real GDP grew at a 2.0% annual rate in the first quarter.  This means three straight quarters of growth, even while economists have been bracing for recession as the Federal Reserve raised interest rates over the past year.  The graph below shows (annualized) quarterly growth rates for real GDP since the third quarter of 2021.

The past year has not been a year of excellent growth, but most economists are pleasantly surprised by consistent real GDP increases, even if these increase have been relatively small. 

While overall real GDP grew at 2.0%, there was significant variation in the four components.  Consumption (C), which makes up about 70% of GDP, grew by 4.2% in the first quarter, investment (I) fell by 11.9 percent, government spending (G) rose by 5% overall while exports rose by 7.8% and imports rose by 2.0 percent. 

Real GDP grew at a robust 6.9% in the fourth quarter of 2021, according to the advance estimate from the BEA.  Combined with growth from the first three quarters, this means 5.7% for the entire year 2021. The graph below shows that real GDP is now almost all the way back to its pre-COVID path.

This data indicates a very strong year of growth for real GDP in historical terms.  But, of course, 2021 was not a normal year.  Coming on the heals of shutdowns in 2020, there was a lot of ground to be made up. Still, with unemployment now below 4% and real GDP growth at almost 7%, it seems like the economy was humming along nicely at the end of 2021.  That is, just before the Omicron variant of COVID-19 really spread at the very end of the year.  It will be interesting to see how growth in the first quarter of 2022 is affected by Omicron.  We can certainly hope that the effects are temporary.

The latest jobs report brings news of lower unemployment and a growth in jobs in August. The unemployment rate for August, ticked down to 5.2% and nonfarm employment increased by 235 thousand jobs. In normal times, this would be great news. But these are not normal times.  

We can't celebrate over this news because it is a clear slowing of the recovery that was roaring through the early summer months.  In June and July, the U.S. economy added 962 and 1,053 thousand jobs.  In comparison, the August figures are just discouraging.  

Furthermore, we've still got a long way to go before the economy really recovers from the darkest COVID days of last year.  The graph below shows total nonfarm employment in the U.S.  This is how we generally measure the level of jobs in the country. At the beginning of 2020, there were more than 152 million jobs.  This plummeted to just 130 million during the COVID shutdowns, but the recovery thus far is clearly incomplete.  Total nonfarm employment in August was just 147 million, down 5 million from the peak and at least 7 million from the pre-recession trend.

We all know the slowing is due to the Delta variant of COVID-19. And the effects are very real.  For example, as the BLS jobs report notes, 5.6 million workers were unable to work because "their employer closed or lost business due to the pandemic."

For the first time since 2014, real GDP in the U.S. grew at 3% or better for two consecutive quarters.  This is based on the advanced estimate for real GDP growth for the third quarter of 2017 released today by the BEA. This is a positive sign especially considering that real GDP per capita since the end of the Great Recession had only been growing at a slow 2.1%.

Unlike the last quarter, where growth was mainly driven by a spike in personal consumption, this quarter showed a much more leveled growth across the different factors that comprise GDP. One change worth mentioning is that for the third time since 2014, there has been a decrease in imports which may be result of a weakening dollar.

A first glance at last week's jobs report might lead you to believe that all is well in the U.S. economy - and perhaps that is true.  But there are recurring indications that some long-term negative trends may persist. 

Let's start with the good news.  The unemployment rate dropped to 4.9 percent, the lowest level since February 2008.  Back then, the economy was entering the Great Recession and the unemployment rate rose to 7.3% by the end of that year.  The graph below shows the unemployment rate since 2005.  It really is nice to see the steady declines over the past five years. 

In addition, the 151,000 now jobs added to nonfarm employment extends a streak of more than five years now (since October 2010) of gains in nonfarm employment.  So the total number of jobs is growing and the unemployment rate is dropping.  What can possibly be bad about the labor market?

Digging a little deeper, we see continued evidence of a disturbing long-term trend that many economists are watching closely.  In particular, the labor force participation rate (LFPR) is still very low as more than 94 million remain outside the labor force.  The graph below shows the labor force participation rate going back twenty years to January 1996.

I've covered this before (see here and here), but a quick review is in order.  When the LFPR falls, it means that some work-eligible adults are no longer working or actively seeking work.  But it also means that GDP is being produced by a smaller fraction of the population.  More and more people are "sitting on the sidelines."   

Where are all these potential workers?  Economists are still teasing out the answer, but one big reason is demographic and the other big reason is a weak macroeconomy.  The demographic piece is due to the aging labor force: baby-boomers are now retiring and this will continue for the next 15 years.  But, as you can see in the graphic above, the weak economy drove many workers out of the labor force and many have not re-entered.  For many, job prospects are just not as good as they were prior to the Great Recession. 

This biases the unemployment rate downward.  Imagine the LFPR rose again to pre-Great Recession levels. In December 2007, at the onset of the Great Recession, the LFPR was 66 percent.  If the LFPR climbed to 66% again tomorrow, more than 8 million workers would enter the labor force.  If none of these workers found jobs, this would drive the unemployment rate up to 9.65 percent.  More realistically, if half the workers found jobs, the unemployment rate would climb to 7.34 percent.  That seems more in line with the economy I live in. 

The bottom line is that the economy is not doing as well as the unemployment data indicates.  Much of the reason why we only see 4.9% unemployment is because the labor force has shrunk.  Let's hope this is not a permanent change. of late. 

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.

Do you think it is hard to find a job in the United States? Try looking in Spain, where youth (15-24 years old) unemployment rates have exceeded 50% since 2012.  The figure below shows youth unemployment for both Spain and the United States beginning in 1995.  Even when Spain was experiencing strong economic growth from 1995 to 2008, youth unemployment rates were around 20 percent!

But it is not just rough for the youth of Spain: the figure below shows overall unemployment rates in Spain, which consistently dwarf those from the United States. 

Economists believe the main reasons for these differences are labor market regulations in Spain – regulations that were actually put in place to help workers.

For example, mandated severance pay in Spain is particularly generous.  Until 2012, any Spanish firm that wished to fire a worker was required to continue to pay them for 45 days for every year they were employed.  Thus, if a firm wanted to fire a ten-year employee, they’d have to pay them for 450 days after their employment ended.  This regulation make it very difficult for young workers to break into the labor force.  They also incentivize firms to search longer for just the right worker to fill open positions.  Both of these increase frictional unemployment.  In 2012 this requirement was reduced to 20 days of pay for every year of employment.

Another regulation is mandated annual increases in wages and benefits.  That is, firms are required by law to give pay and benefits raises every year.  Think about this from the firm’s perspective: before you ever hire and retain a worker for more than a year, you will be sure they are worthy of their current pay plus raises.  These regulations increase the time firms spend searching for just the right match, and again, increase frictional unemployment.

Remember: Incentives affect behavior.

All of this data is available from the Organization for Economic Co-operation and Development (OECD).