April 29, 2017
The Washington Post’s article on first quarter GDP growth wrongly told readers that unusually warm weather slowed GDP growth in the first quarter. The rationale was that this lead to a decline in the use of electricity and heating compared with a normal winter, which meant less output. While I noted this fact in my own write-up of the GDP report, the drop in energy usage was more than offset by an increase in construction that was made possible by the mild weather.
Residency and non-residency construction rose at 13.7 percent and 22.1 percent annual rates, respectively. The former increase added 0.5 percentage points to the quarter’s growth rate, while the latter added 0.55 percentage points. By contrast, the drop utility usage likely lowered growth by around 0.4 percentage points. (The release lumps it in with housing consumption, so it does not provide a direct measure.) This means that on net, good weather was almost certainly a net positive even before considering its impact on restaurant spending and other forms of consumption.
The major anomaly in the first quarter data was the slow pace of inventory accumulation, which subtracted 0.93 percentage points from growth. Pulling out inventories, the growth in final demand was 1.6 percent in the first quarter which is very much in line with the 2.0 percent average annual growth rate for the last six years.
There are a couple of other points worth correcting in this piece. It notes the drop in the percentage of the population that is working or looking for work from 67.3 percent in 2000 to less than 63 percent today. It attributes this to the retirement of the baby boomers. Actually, the retirement of the baby boomers is the less important part of the story. A much smaller percentage of prime-age workers (ages 25 to 54) is employed today than in 2000.
The employment-to-population ratio for prime-age workers is down by 3.7 percentage points from its peak in April of 2000. This drop has taken place among both prime-age women and prime age men, so efforts to blame it on men no longer having the skills needed to be employed in the modern economy don’t pass the laugh test. (Employment-to-population ratios are a more policy neutral measure than labor force participation rate, since the decision to continue to look for a job, and therefore be counted as part of the labor force, is influenced by the generosity of unemployment benefits.)
In 2000, it was widely projected that women’s labor force participation would continue to rise in the next decade. This means that unless the country’s top economists were badly mistaken in 2000, there is considerable room for increased employment if we see a rise in demand.
The piece also misses an important point about the Reagan tax cuts. It tells readers:
“After an initial recession during the Reagan administration, GDP skyrocketed 7.3 percent in 1984 and continued at a rapid clip for the rest of his term. Reagan, however, had advantages that Trump will not have. In the 1980s, women were swelling the ranks of the labor force and the economy was on the verge of a technological boom. Today, growth in productivity — an important measure of how much the American economy can produce — has stalled, for reasons economists do not well understand.”
The 7.3 percent growth in 1984 was possible precisely because of the fact that the country had endured a steep recession. It is common to see very strong growth following a sharp downturn as people resume buying homes and cars after putting off these purchases in the recession. We saw the same story following the steep recession in the mid-1970s. The economy grew at a 5.2 percent average annual rate in the years from 1976 to 1978.
It is also worth noting that we did not see any productivity upturn in the Reagan years, as productivity growth remained very slow throughout the decade. We didn’t begin to see the productivity uptick from information technologies until the middle of 1995, long after Reagan had left office.
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