October 17, 2013
The NYT, along with most of the rest of the media, has been eager to highlight the costs and risks of a debt default and even the standoff over the debt. An article today pushed this line in part by misrepresenting the impact of the 2011 standoff. The piece quoted Beth Ann Bovino, chief United States economist at Standard & Poor’s:
“‘We saw huge effects during the summer of 2011, with consumer confidence hitting a 31-year low in August and third-quarter G.D.P. growing just 1.4 percent, … Given that this round of debt ceiling negotiations” took place during a shutdown, she said, “the impact on the economy could be even more severe.'”
The idea that third quarter GDP took a big hit from the standoff is more than a bit misleading. The sectors that might be expected to take a downturn from the uncertainty, consumption and investment, both did reasonably well. Consumption grew at a 2.1 percent annual rate in the quarter, up from a 1.8 percent rate in the first half of 2011. Fixed investment 14.8 percent annual rate in the quarter compared to a 4.1 percent growth rate in the first half of the year. Spending by the federal government and state and local governments did fall in the third quarter, but this was largely due to the end of the stimulus.
However the major drag on growth in the quarter was a slower pace of inventory accumulation. Inventories grew at a very rapid pace in the second quarter, adding 0.72 percentage points to growth for the quarter. The growth rate was considerably slower in the third quarter (this zigzag pattern in inventories is common). As a result, inventories subtracted 1.6 percentage points from GDP growth in the quarter. The 3.0 percent rate of final demand growth was the strongest of 2011.
Addendum:
This piece also mistakenly tells readers:
“Standard & Poor’s is more pessimistic, estimating that the shutdown will cut about 0.6 percent off inflation-adjusted gross domestic product, equivalent to $24 billion. Most analysts are predicting that growth will remain subpar, at an annual pace of 2 percent or less.”
The 0.6 percentage point drop is in the growth rate for the quarter, not GDP. (The drop in GDP would be roughly one fourth this amount, on an annualized basis.) Growth in the fourth quarter should increase by roughly the same amount as the third quarter falloff, although the loss in output in the third quarter will be permanent. Government workers cannot retroactively work the days they missed.
Thanks to Robert Salzberg for calling this to my attention.
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