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Washington Post, July 27, 2018
Q&As on this A.M.'s big GDP report; The good news: We got strong,
above-trend GDP growth last quarter. The bad news: It's still not
reaching people's paychecks
by Jared Bernstein
What's the top-line number? The most aggregate measure of the U.S.
economy posted a strong 4.1 percent growth rate last quarter, the
fastest clip since 2014, and a marked acceleration over the first
quarter's growth rate of 2.2 percent. By the way, the gross domestic
product now stands at about $20 trillion, which makes it easier to put
billions in context. If someone says "$200 billion!" you say, "That's 1
percent of GDP."
While not quite top-line, a few other numbers from Friday's release are
especially important. The headline growth rate of 4.1 percent is an
annualized quarterly growth rate, which makes it quite noisy. Other
measures are more useful to pull out the trend, or the underlying,
sustainable growth rate.
- Year/year: Between Q2 last year and this year, real GDP was up 2.8
percent, slightly up from 2.6 percent last quarter (the figure below
shows that the annual rate is a smoother version of the quarterly
rates). Since 2017, the average year/year growth rate has been about 2.5
percent, which is a reasonable estimate of the underlying trend. As you
can see at the end of the figure, GDP has accelerated a bit in recent
quarters, but it's about where it was in 2014-2015, so don't let anybody
tell you that Friday's results are unprecedented.
- As I'll note, temporary factors, including the trade war, pushed up
growth last quarter, which boosted exports and government spending.
Final sales to private, domestic purchasers takes out those components
but leaves us with an even stronger growth rate of 4.3 percent,
suggesting quite strong private sector demand. Here again, however, it's
more revealing to look at year/year changes, and the figure below shows
a trend growth rate in this measure of about 3 percent around a steady
trend.
Why the jump to 4.1 percent? Growth in the spring was powered by
consumer spending, which contributed 2.7 points to the 4.1 top-line
number. Business investment was so-so in the quarter, so not much to see
from the alleged tax-cut effects boosting business investment, though
it's still early for that. Housing investment was a negative, and given
softness in that sector, I'm putting housing on my watchlist going
forward. Net exports added a point to growth, a big contribution that is
largely a function of the trade war, as described below.
Sounds like good news. Is it? That's a trickier question than you might
think. At one level, of course it's good news. It signals that the
economic expansion is still solidly on track, even amid a lot of
worrisome noise around trade. Moreover, the faster pace of growth in the
quarter does not appear to pose overheating risks: A key price gauge
rose about 2 percent, and workers' wage gains are, if anything, behind
the growth curve.
In fact, there's a lot of evidence that GDP growth is not reaching
middle- and low-income workers, at least not as much as we'd expect
given the tight labor market. Moreover, GDP is not the be-all and
end-all that we often make it out to be, especially on days like Friday.
It doesn't account for either environmental degradation or the
distribution of growth, nor does it measure well-being, which, in richer
countries, is only weakly correlated with GDP.
That said, the absence of GDP growth, as in recessions, is unequivocally
negative. Thus, the key insight about GDP growth is to recognize not
just its importance but its limitations.
What impact does the trade war have on Friday's results? Exports are a
plus to GDP, and in an effort to sell their products abroad before the
tariffs took effect, farmers jammed a lot of produce, e.g., soybeans,
into the global supply chain last quarter. Such time-shift factors -
export more now, less later - should not be conflated with the
underlying trend.
Ultimately, most of us who scrutinize such things believe the trade war
is likely to slow growth a bit, in part through a higher trade deficit
(in fact, numerous factors are pushing up the dollar, which makes our
exports less competitive). While its impact on overall GDP growth may be
small - we're much less exposed to foreign trade than other advanced
economies - its impact on specific industries, like agriculture
exporters, are already being felt. Moreover, the extent of escalation is
unknown at this point, so this, too, is worth watching.
Is the strong number due to the tax cuts? Not just the tax cuts, but
billions in deficit-financed spending, are juicing GDP growth. It's very
unusual in the history of American fiscal policy to apply this much
stimulus at this stage of the recovery, as the private-sector economy is
already closing in on full capacity. However, we have no evidence at
this point that the fiscal boost is leading to overheating, as in much
faster price growth, that the Fed would feel compelled to offset with
faster rate hikes.
The other key point about the tax cuts and other deficit spending is
that they are scheduled to fade by around 2020, meaning that unless
Congress decides to put even more spending or tax cuts on the credit
card, this source stimulus will provide less support for growth in a few
years. That doesn't imply recession, by the way, but it does signal a
potential downshift.
Is this relatively high growth rate sustainable? No. It's an upside
outlier that will come down in future quarters. I especially wouldn't
count on net exports to provide the boost they did last quarter, and I
just noted that the fiscal impulse is likely to fade as well. That said,
remember that our GDP is almost 70 percent consumer spending, so as long
as the tight labor market keeps generating solid job gains, even if real
wages don't grow that much, we'll still get strong consumer spending
fueling GDP growth, just closer to the 2.5 percent underlying trend than
to Friday's 4 percent number.
I can see where economists and politicians might get excited about this
news. But what should normal people think about it? If you're someone
whose family depends on your paycheck vs. your stock portfolio, you
should be happy to see the Goldilocks aspects of Friday's report -
faster growth without overheating prices - but you've every right to
hold your applause until overall growth starts to lift your living
standards. Especially in our era of high economic inequality, GDP should
definitely not be taken as a signal of broad well-being. For that, we
have to look at not just how "the economy" is doing, but how all the
people in the economy are doing.
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