October 31, 2003

Last Summer's Boom

The Angry Bear has some very nice and interesting thoughts about last summer's economic boom:

: Explaining the GDP Boom

Further insight into yesterday’s big GDP numbers was provided by the release this morning of the September personal income and spending data by the BEA. Both income and spending were sharply lower in September compared to August. The reason? Overwhelmingly, it was because of the end of the one-time tax rebates sent out over the summer. In the graph below, you can see the big bump in both disposable income and consumer spending in July and August, which was almost entirely due to the tax rebates.



What does this mean? Three things.

First: this provides strong evidence that the huge increase in GDP last quarter, which was powered largely by consumer spending, was largely due to the tax cut. Good old fashioned Keynesianism, as AB pointed out. The mortgage refinancing boom helped some, too, but the lion’s share of the credit goes to the tax cuts.

Second: this suggests that last quarter’s GDP figures were an aberration. The fourth quarter will most likely not be nearly as good, since the tax rebates have now been spent and their impact on the economy is pretty much gone. So expect GDP growth to slow.

Third: we can also expect the third quarter GDP growth figure of 7.2% to be revised downward when the updated estimate is released on November 25. The advance figures, which we got yesterday, are mostly based on July and August economic activity. The revisions will take September more into account, and thus will be lower. When all is said and done, we may well find that 3Q GDP growth was around 6%.

One last point about yesterday’s GDP report. Don’t spend too much time looking for a downside to it. Even if it's only 6%, it's a genuinely good report. The economy is indeed slowly improving (though there are reasons why I think the economy will slow down again in another 6-12 months).

Posted by DeLong at October 31, 2003 03:08 PM | TrackBack

Comments

Tinfoil-hat time.

So, umh, if you're going to goose the GDP numbers with the one-time proceeds of a consumer tax cut, why do it a whole year before the election? Shall we expect another round of tax cuts, designed to produce a surge in Q3 2004 GDP growth?

Posted by: Jacques Distler on October 31, 2003 07:48 PM

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Of course, given lags and all, the consumer-spending-driven notion of last quarter's GDP spike could also make complete hash of the productivity-growth arguments, since the relationship between work and (measured) outputs and inventories could be damn-all anything for a couple of months. (If Enron and Worldcom have taught us anything, it should be that single-quarter sales, expense, and inventory numbers are whatever someone thinks their boss wants them to be.)

(That, in turn, might be a good thing when next quarter's numbers roll around.)

Posted by: paul on October 31, 2003 07:50 PM

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There is another anomaly about the current economy that puzzles me. We have the lowest official inflation and interest rates in 40 years. And yet practically all my major household expenses like property taxes, healthcare and other insurances, kid's college expenses, energy costs,... are increasing at or near double digit rates, the fastest rates of increase in my memory. I must be typical.
Something has to give here; is it going to be the middle class life we have come to expect?

Posted by: BobNJ on November 1, 2003 08:01 AM

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There is another anomaly about the current economy that puzzles me. We have the lowest official inflation and interest rates in 40 years. And yet practically all my major household expenses like property taxes, healthcare and other insurances, kid's college expenses, energy costs,... are increasing at or near double digit rates, the fastest rates of increase in my memory. I must be typical.
Something has to give here; is it going to be the middle class life we have come to expect?

Posted by: BobNJ on November 1, 2003 08:06 AM

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There have been significant price increases recently for several types of goods and services, from tuition to natural gas, but the mix of prices through the economy shows minimal inflation. Vehicle prices dropped last quarter. Whether the mix of prices is changing in a way that will hurt middle class families, is another interesting and important question.

The guess is that far more important than inflation for middle class families these days is ability to retain jovbs and gain wage increases.

Since growth in consumer sales and income is slowing again, we have to hope there will be a quick turn in job creation. The guess is that jobs will continue to be the problem for the rest of the year.

Posted by: anne on November 1, 2003 10:48 AM

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The assertion that the GDP results will necessarily be revised down because revisions will take September's consumer spending decline into account is misleading. While the Sept personal income/consumption data were released a day after the GDP report, they were available to the BEA and included in its preliminary GDP estimate. New information on Sept trade, inventories will be released and included in the next estimates, but its not as if Commerce just ignores that month --- it uses its own guess as to what the Sept data will show. It's only if September trade and inventories come out weaker than expected, or if, say, the existing figures on September's consumer spending drop are revised lower, than we will see a downward adjustment in Q3 GDP.

One interesting angle in all this is that the DeLong/Krugman camp had argued that the tax cut was so poorly distributed that it would be ineffective as a growth spur. While like any other stimulus package, its impacts will fade down the road, risking an overall economic slowdown, its pretty hard to argue that the first round impacts of the Bush cuts were anything but impressive.

Posted by: Avery Shenfeld on November 3, 2003 07:45 AM

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Um, I think Angry Bear may be betting the wrong way on the revision. Quarterly spending data released with the September figures matched the GDP data - the GDP data already include the slowdown in September, as far as I can tell by comparing the two sets of PCE figures. They were, after all, released just one day apart, so it would be pretty silly for Commerce to post different results in the monthly PCE report than in the GDP figures. Tack on to that the big gain in construction spending in September (+1.3%) and upward revisions to prior months, and you have what, ignoring revisions to any other components, points to an upward revision to Q3 GDP. So that's up, not down, given the data in hand so far.

I agree with the notion that tax cuts account for most of the boost to GDP, given that there have been strong refis most of the way through the period of slow growth. The new thing is the rebate checks. On the point about slower growth in Q4, well, that notion is already pretty much universally accepted. Even the president has said he expects slower growth in Q4. ISM data, which have a pretty good predictive record, are pointing to pretty hefty growth early in Q4. The orders index, which ought to be leading, suggests strength will continue. So the real question is not whether growth will slow, but by how much. Will it slow to a pace that would not lead to job growth? Fed guys think there will be job growth in Q4, but they have been to cheerleader camp. We'll see.

Posted by: K Harris on November 3, 2003 08:00 AM

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Oops,

Sorry, Avery, for jumping on the stage just as the applause was about to begin. I can only offer that, when I got started, you hadn't posted yet.

K

Posted by: K Harris on November 3, 2003 09:51 AM

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