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.

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.

This morning, the BEA released the GDP estimates for last year.  The headline figure is the advance estimate of GDP for the fourth quarter of 2017. Real GDP, inflation, unemployment and the labor force participation rate will be the main statistics that we will follow this semester. After taking into account two strong quarters and historically low unemployment rate, at 2.6%, real GDP growth seems underwhelming. But let's not jump into premature conclusions.

We can look more closely at the different components of GDP to better understand why the last quarter was actually pretty strong.  GDP is divided between spending on consumption (C), Investment (I), government spending (G), and net exports (NX).  Consumption increased by 3.8%, investment by 3.6%, government consumption expenditures and investment by 3.0%, exports by 3.9 percent.  What limited overall GDP growth is a 13.9% increase in imports.  This increase in imports is not harmful to the U.S. economy (we get more goods and services!).  But imports enter negatively in the National Income Accounts and so they reduce the estimate of GDP growth.  It is a little ironic that imports increased so much, given the Trump administration’s protectionist rhetoric.  In fact, this represents the largest import growth since the third quarter of 2010.

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.

This morning, the BEA released its advance estimate of GDP data for the first quarter of 2017.  Real GDP growth is estimated at just 0.7 percent.   Remember that this first estimate is rough and has lately been subject to upward revisions.  Still, this estimate implies that the U.S. economy is really just sputtering along. 

None of the four main components of GDP increased much.  The table below shows how each contributed to the overall growth rate. 

The meager increase in consumption spending is particularly worrisome in historical context: this is the smallest increase since the fourth quarter of 2009.  This is a bit surprising due to the recently high estimates of consumer confidence.   And remember that consumption makes up about 70% of total GDP spending. 

The advance GDP estimate for 2016 is sobering but also an opportunity to learn a little about the details of how we measure GDP. Let's look at the headline data first and then circle back for a quick lesson in GDP accounting. 

Overall, GDP in the fourth quarter grew at just 1.9 percent, according to this first estimate.  This estimate will be revised over the next three months, but it is not encouraging.  The figure below shows real GDP growth by quarter back to 2006.  The last quarter of 2016 caps off an anemic year of 1.8% growth overall.  2016 pales in historical context, since average real GDP growth over the past 50 years was about 3 percent. 

Now, let's dig a little deeper into the fourth quarter figures to see the contribution to growth from the four major categories of GDP expenditures: consumption, investment, government and net exports.  The table below shows how each of these components contributed to the overall growth rate of 1.9 percent.

Growth in private spending on consumption and investment goods and services was strong.  But net exports (exports minus imports) pulls down the final number by 1.7 percent.  This is largely due to an increase in imports of $65.7 billion during the fourth quarter.  Now we get to the (boring) details of national income accounting.  Imports don't make us worse off - more imports mean we get more stuff from around the world.  But when we tally up gross domestic product (GDP), we subtract imports because they weren't produced here. 

Bottom line: the fourth quarter wasn't great, but the large increase in imports skews measured GDP downward some. 

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.