February 03, 2015
Matt O’Brien usually has interesting stuff on the economy is his Wonkblog pieces, but his post on the “economic boom” is not up to the usual standards. First, and most importantly, the idea of grading on a curve — because things are better here than elsewhere we have a boom — is rather dubious. Some countries were hit less hard by the depression than others. Would we want to say that they were experiencing a “boom?”
Even if we accept grading on a curve it’s not clear we have much of a story. The widely touted “recession” in Japan is seriously misleading. The Japanese proponents of austerity wanted to show that they could do as much damage as their counterparts in the U.K., euro zone, and U.S.. They insisted on a 5 percentage point increase in the sales tax in April. This led to a sharp drop in output in the second quarter. Output also fell in the third quarter, but this was entirely due to inventory fluctuations, final demand grew.
It is a safe bet that GDP will grow in the fourth quarter and will continue growing at a moderate pace in 2015. In terms of how life is on the ground, unemployment fell from 3.5 percent to 3.4 percent in December, with 1.15 jobs for every applicant, the highest ratio since 1992. It’s true that Japan is likely to experience slower growth than the U.S., but this is largely due to it having a slowly shrinking population rather than a population growing at a rate of 0.7 percent. There is likely to be little difference in the rate of per capita GDP growth, which is economists’ standard measure of income.
Much is often made of slower or negative population growth. There is no reason that anyone except the “it’s hard to find good help” crowd should be concerned about such things. If an economy is experiencing healthy rates of per capita GDP growth, then the slower population growth simply means less strain on infrastructure and the environment.
There are a few other items that are not quite right in O’Brien’s piece. In noting the relatively weak fourth quarter growth he commented:
“It didn’t help that the Pentagon cut defense spending, like it usually does in the fourth quarter, by 12.5 percent.’
That’s not quite right. If the Pentagon usually cuts spending in the fourth quarter as it did last year it would be picked up in the seasonal adjustment and therefore show no change. The large cut in spending reported in the 4th quarter was not usual, it followed an unusually large jump in spending that added 0.8 percentage points to growth in the third quarter. Military spending is often erratic and large swings in one direction are usually followed by large swings in the opposite direction.
Then we get this discussion of consumer spending:
“Consumer spending exploded to make up 2.87 of the economy’s 2.6 percentage points of growth in the fourth quarter. (Yes, everything else combined to subtract from it). That’s the kind of spending that would would normally evoke words like “unsustainable,” but not as much when lower prices at the pump are putting more money in people’s pockets. And if the last few months are any indication, it could make the economy’s already-virtuous circle even more so, as more spending leads to more jobs, which, in turn, leads to even more spending, and so on, and so on.”
The issue here is whether we expect to consumer spending to continue to outstrip the growth in income. This would imply a further decline in the saving rate. (Imply means that it is true by definition, if consumer spending outpaces income growth, then the saving rate falls.) Given the saving rate was just 4.6 percent in the fourth quarter, a lower level than at any point since World War II, except at the peaks of the stock and housing bubbles, it seems unlikely that we will see much further drop. In other words, consumption growth in 2015 is likely to follow relatively closely on income growth, which will almost certainly be considerably slower than its 4.3 percent rate in the fourth quarter.
Then he turns to the category of final sales to domestic purchasers, which he tells readers:
“shows us how much of today’s growth we can expect to continue tomorrow. The surprising answer is that, even though annual GDP growth slowed from 2.7 percent in the third quarter to 2.5 percent in the fourth, this “core” growth actually ticked up from 2.7 to 2.8 percent.”
This is not quite right. Final sales ignore imports. If a rising share of the goods and services we consume in the United States are imported (as is in fact the case), then the growth of final sales will exceed the growth in GDP, unless they are offset by equal growth in exports. In this respect the rising dollar should raise serious concern. The sharp rise in the dollar in the second half of 2014 is likely to accelerate the growth in imports and dampen the growth in exports, leading to a divergence between the growth in final sales and GDP.
Long and short, you might want to leave those economic boom pennants in the closet for now.
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