Economic Growth

Solid Real GDP Growth to Close Out 2021

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.

Jobs Growth Resumes

Today's jobs report from the BLS is a dose of much-needed good news.  The unemployment rate dropped again to 4.6 percent.  More importantly, 531,000 new jobs were added (to nonfarm employment).  The graph below shows monthly growth in nonfarm employment in this calendar year.


After robust growth in the summer months, fewer jobs were added in August and September. All of this is closely linked to the spread of COVID, as the Delta variant spread rapidly in August and September, before slowing in October.  

Let's hope that today's announcement regarding the Pfizer COVID-19 pill will lead to even more economic progress over the coming months. 

Recovery Slows in Third Quarter

Real GDP grew at just 2% in the third quarter, after consecutive quarters of more than 6% growth.  New data released from the BEA confirms that the Delta variant of COVID-19 significantly slowed the return to normal economic growth.  The Figure below compares real GDP with a trend line based on growth since 2010.


As a recap, shutdowns in early 2020 led to a 5% drop in the first quarter and then a 31% drop in the second quarter.  Then, as many businesses adapted, the recovery began with a whopping 33.8% growth of real GDP in the third quarter.  The first two quarters of 2021 yielded 6.3 and 6.7 percent growth as vaccine availability expanded.  But the Delta variant clearly slowed the progress back toward trend, leading to just 2% real GDP growth in the most recent quarter.

Like everyone else, economists are hopeful that the recent decline in COVID-19 cases will help return us to pre-pandemic economic conditions, but 2% growth will not accomplish that.

Jobs Growth Slowing

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."

Second Consecutive Quarter of Solid Growth

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.


Is 2% the New Benchmark? I Hope Not.

GDP growth continues to disappoint. Today's advance estimate from the BEA pegs real GDP growth at just 1.22% in the second quarter.  Further, the new report revises the first quarter rate down to just 0.8 percent.  Ooof.  The graph below shows quarterly growth rates in real GDP since the beginning of 2006.
Quaterly GDP July 2016
Before the Great Recession, we got used to an average of 3% real GDP growth for decade after decade.  But since that recession ended, real GDP has grown at just 2% per year. The last four quarters are now: 1.99%, 0.87%, 0.83%, and 1.22%.  A decade ago, we'd consider that a horrible year. 
So why isn't there more concern? Because unemployment rates have been consistently around 5 percent.  But don't forget about the very low labor force participation rate, which is below 63% and this past year has been lower than at any time since the 1970s.  So maybe this is the new normal: 2 percent real GDP growth, 5% unemployment, and millions of workers sitting on the sidelines.  I hope not. 

GDP 2015: Not so Great

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. 


College Students Need Macroeconomics Principles

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.

GDP Third Quarter 2015

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.



Ho-Hum Growth in Second Quarter

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.

 GDP 2q2015

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:

Growth components