The New Normal (Bill Woolsey wins)

In a post written 7 months ago I predicted that 3% NGDP growth would become the new normal:

It’s becoming increasingly clear that when the labor market recovers, RGDP growth will be very slow, maybe 1.2%.  Add in about 1.8% on the GDP deflator, and 3% NGDP growth looks like the new normal, assuming the Fed intends to stick with 2% PCE inflation targeting.  Bill Woolsey wins!!

The figures for 2014 were announced today.  NGDP growth was 3.70% (vs. 4.57% in the Year of Austerity.)  And RGDP growth was 2.48%, (vs. 3.13% in the Year of Austerity.)  Growth slowed because the Fed offset the easing of fiscal austerity with its own tapering, to prevent the economy from “overheating.”

The 3.7% figure suggests we are right on track for 3% trend NGDP growth.  Here’s why:

1.  Unemployment fell 1.1% in 2014.  Okun’s Law implies that output grew at about 2.2% above trend.  However recent Okun’s parameter estimates are a bit lower, so let’s say output grew about 1.5% above trend.

2.  Inflation in the GDP deflator was about 0.6% below the 1.8% that I expect.

If inflation rises by 0.6% and RGDP growth slows by 1.5%, then we are right at 2.8%.  Add in a couple tenths of a percent for people returning to the labor force.

The upshot is that with low NGDP growth we’ll have low interest rates, and we’ll hit the zero bound in every future recession.  If the Fed doesn’t give up its interest rate targeting regime, we’ll have a dysfunctional monetary policy going forward. Let’s hope they switch to an instrument with no zero bound (say the base, or NGDP futures prices.)  Alternatively, they could switch to level targeting.

Update:  I have a new post at Econlog showing how badly the CBO misforecast 2013.



31 Responses to “The New Normal (Bill Woolsey wins)”

  1. Gravatar of Brett Brett
    30. January 2015 at 08:08

    Oh, boo US government. Why settle for 3% NGDP growth when you could have 6%? The US has a flexible economy and the ability to absorb millions of immigrants – we can do it!

  2. Gravatar of Britonomist Britonomist
    30. January 2015 at 08:09

    The report established rising imports from a slower global economy and less government purchases as the primary factors, as well as a decline in inventory spending. I suppose an overly strong dollar is partially to blame for rising imports, but given the plummeting euro, plummeting oil prices and slowing global growth it would have take an extraordinary effort by the fed to keep the dollar from rising.

  3. Gravatar of ssumner ssumner
    30. January 2015 at 08:16

    Brett, That would make economics fun again. It’s gotten so dreary.

    Britonomist, Yes, but keep in mind that while government purchases changes affect quarter by quarter NGDP growth, over longer periods they are washed out by monetary offset. Ditto for trade and other factors.

  4. Gravatar of Kevin Erdmann Kevin Erdmann
    30. January 2015 at 09:14

    Sad but true. The housing market has been slaughtered by Fed policy. To reach equilibrium, homes would need to appreciate by about 30% and long term real interest rates would need to recover by about 1%. If recent regulatory lenience in the mortgage market allows banks to lend again, home price appreciation will probably shoot back to 10-15% per year. When that happens, everyone will shit a brick, and the Fed will not only send us back to ZLB, but I expect that they will severely invert the yield curve and body slam us there. Inflation will likely remain fairly low, so they will do it because of fears of “financial instability”.

  5. Gravatar of flow5 flow5
    30. January 2015 at 09:32

    I am the Alpha and the Omega. Leland Prichard was the smartest human to walk on this planet.

  6. Gravatar of flow5 flow5
    30. January 2015 at 09:38

    The money stock can never be managed by any attempt to control the cost of credit (i.e., thru pegging the interest rate returns on government securities; or thru “spreads”, “floors”, “ceilings”, “corridors”, “brackets”, IOeR, etc.). Keynes’ liquidity preference curve (demand for money) is a false doctrine.

    Monetary policy objectives should be formulated in terms of desired rates-of-change in monetary flows [ M*Vt ] relative to rates-of-change in real-gDp. Rates-of-change in nominal-gDp can serve as a proxy figure for rates-of-change in all transactions [ P*T ]. Rates-of-change in real-gDp have to be used, of course, as a policy standard.

  7. Gravatar of flow5 flow5
    30. January 2015 at 09:40

    Flow5January 13, 2015 at 8:38 AM

    Rates-of-change in monetary flows, our means-of-payment money times its transactions rate-of-turnover, or the proxy for inflation, has fallen by 2/3 since January 2013.

    Rates-of-change in the proxy for real-output held up until July 2014, but has since fallen by 1/2.

    So aggregate monetary purchasing power, or as Keynes called it, nominal-gDp (which is a proxy for all transactions in Irving Fisher’s “equation of exchange”), has taken a big hit.

    The Fed has unintentionally set up a liquidity squeeze, collapsing commodities, artificially raising the dollar’s exchange value, and suppressing longer-dated bonds. Where are the nominal-gDp targeting advocates when they’re desperately needed?

  8. Gravatar of Vivian Darkbloom Vivian Darkbloom
    30. January 2015 at 09:51

    So, per your headline, the “new normal” is that Bill Woolsey wins?

    Good for Bill.

  9. Gravatar of Ray Lopez Ray Lopez
    30. January 2015 at 10:18

    Sigh, here we go again, to paraphrase Reagan. I invite the reader to go here: and here: and check out, for whatever years they want, the data themselves.

    Sumner is wrong, again, when he says: “The figures for 2014 were announced today. NGDP growth was 3.70% (vs. 4.57% in the Year of Austerity [2013].) And RGDP growth was 2.48%, (vs. 3.13% in the Year of Austerity.)”

    Just look at the data for 2013 vs 2014. Notice 2014 is higher than 2013 (the year of austerity) except for one quarter (due to bad US east coast weather in ’14, Q1), while in the second link, no less than the World Banks says: “2013 2.2% [growth rate]… ‘Slow growth thanks to sequestration. Low nominal GDP growth thanks to low inflation.’

    Meanwhile, in today’s news, this screen scrape says: “The Commerce Department reported Friday [1/31/15] that US gross domestic product grew at an annual 2.4 percent pace last year, up from 2.2 percent in 2013”

    All three sources say 2014 US GDP of 2.4% was greater than 2013 US GDP of 2.2%. And the World Bank says 2013 US GDP was lower than otherwise due to sequestration, exactly what the Open Letter Keynesians said that Sumner castigated.

    So there. Who you gonna believe? Three different data sources including the World Bank? Or S. Sumner’s fantasy? Hope this post goes through and is not moderated for having excessive links…or for some more sinister reason.

  10. Gravatar of Brian Donohue Brian Donohue
    30. January 2015 at 11:23

    Data point: 30-year Treasury yield right now: 2.25%. Lowest ever.

  11. Gravatar of Chuck E Chuck E
    30. January 2015 at 11:57


    Why don’t you use the US Commerce Dept. numbers?

  12. Gravatar of flow5 flow5
    30. January 2015 at 12:16

    Oil rebounding in concert with roc’s in MVt.

  13. Gravatar of Scott Sumner Scott Sumner
    30. January 2015 at 12:18

    Ray, I warned you early on that you were in way over your head. My data is accurate, the media has it wrong (as usual.)

    And are you really claiming that a snowstorm last winter affected 2014 Q4 RGDP? Seriously?

    Brian, I was thinking of doing a post on that.

  14. Gravatar of Scott Sumner Scott Sumner
    30. January 2015 at 12:19

    Flow5, Even smarter than Ray?

  15. Gravatar of Kenneth Duda Kenneth Duda
    30. January 2015 at 13:01

    Off topic, I was hoping Scott could comment on this WaPo piece:

    I felt nervous, reading the draft of HR 5018, that the act would more complicate the Fed’s operations than lead to any important improvement in monetary policy.


  16. Gravatar of Charlie Jamieson Charlie Jamieson
    30. January 2015 at 13:05

    I predict T-bond rates will go even lower.
    Because central banks are now buying g-bonds in large measures, I could see them going to zero. If a central bank eventually is going to finance government spending, why pay interest at all. Also if total debt continues to rise, politically it’s going to be difficult to justify paying interest if rates were to go back to 5 or 6 percent.
    Interest rates in other markets would uncouple from T-bond rates.
    Just speculation.

  17. Gravatar of benjamin cole benjamin cole
    30. January 2015 at 13:21

    Excellent blogging. QE, perhaps sustained, perhaps to even monetize taxes, must be considered conventional policy.
    Or we can live with deflationary recessions as the norm, with rising federal debt.

    Side note to Scott Sumner: the reason I suggested a tax holiday in Switzerland financed by SNB QE is that the Swiss citizens appear concerned about a rising SNB balance sheet. So, instead, the SNB simply prints money and gives it to the Swiss Treasury, while taxpayers are given a year holiday.

  18. Gravatar of Anthony McNease Anthony McNease
    30. January 2015 at 13:47


    “Data point: 30-year Treasury yield right now: 2.25%. Lowest ever.”

    This clearly supports Bullard’s fears that the economy is overheating. [/sarcasm] Listening to that interview this morning and now seeing this is convincing me to short the US.

    So in June the Fed raises rates to combat “inflation.” Loans decrease and savings increase slowing velocity all while AD in the EU goes stagnant to negative and Asia slows down. Is the smart thing to do now to sell and hoard cash?

  19. Gravatar of collin collin
    30. January 2015 at 13:54

    Although slightly disappointing, this was expected:

    1) Q4 2014 had the first hit of decreased oil investment as a key indicator. Long term, the economy will do better with lower prices, but GDP did take a hit. I expect similar results in Q1 2015.

    2) A stronger dollar tends to lower GDP with more increased imports.

    3) In reality in Q4, the working class probably did get the major raise in years because of falling oil prices lowering headline inflation.

  20. Gravatar of DanielJ DanielJ
    30. January 2015 at 16:11

    I wouldn’t be so sure Scott. The PCE consumption came in at a strong 4.1% and the biggest drag was government spending(from defense cuts) and import increases. On top of that, Residential Investment is going to see sizable, given not the excess of the pre-2008 bubble, but sizable gains through 2015 to boost fixed investment. I think 3.0% RGDP is still attainable. If anything I’d bet on a 4% NGDP rate if I was betting in Hypermind.

  21. Gravatar of DanielJ DanielJ
    30. January 2015 at 16:12
    ^Bill McBride

  22. Gravatar of Major.Freedom Major.Freedom
    30. January 2015 at 18:38

    Did anyone know that if I predict the government to inflate and bring about an increase in spending and prices in certain industries, like military contracting, while I ignore other industries that crash and burn, then as long as the combination results in a number I oredicted, then I am helping…who exactly?

  23. Gravatar of ssumner ssumner
    30. January 2015 at 20:08

    Ken, I’ll try to get some more information on that.

    Ben, That money would be a liability of the SNB.

    Anthony, See my new post—we think alike.

    Daniel, Yes, I think 2015 will see about 4% NGDP growth, I wasn’t talking about 2015 in this post.

  24. Gravatar of Ray Lopez Ray Lopez
    30. January 2015 at 20:43

    @Sumner – your data is not sourced, mine is. Sumner: “My data is accurate [cite please?], the media has it wrong (as usual.) [oh, a 911 Truther?]” – well I’m calling b.s. Where do you get your data? I just showed you my data shows 2014 had a higher GDP than 2013, exactly as the Open Letter Keynesians implied for 2013 in late 2012. Your numbers for 2014 do not reflect what is being reported on my first link above. I can’t believe your followers believe your tin foil hat data. And yes, the snowstorms of the first quarter, Q1 (not Q4) affected Q1 GDP say the popular press, and why shouldn’t we believe them?

    K. Duda- ask Sumner how he comes up with his numbers, as he listens to you. It’s your money, but I’m afraid you may be backing a maverick.

    @Chuck E – your data is in accord with the data in the first link. It’s Sumner’s data that’s bogus and not sourced.

  25. Gravatar of sdfc sdfc
    31. January 2015 at 00:31


    The numbers differ because Scott is using Q4/Q4 growth as if there were something special about Q4. The correct calculation for GDP in any particular calendar year is of course the whole of year number which was in fact 2.4%, up from 2.2% in 2013. This number and the previous years’ growth can be found in Table 7 of the BEA release.

    Unfortunately it doesn’t fit the narrative and so is ignored.

  26. Gravatar of Ray Lopez Ray Lopez
    31. January 2015 at 03:39

    @sdfc – yes, I figured that out from the Econlog blog post Sumner replied to me in. Thanks for that clarification. I’m glad to say at least one skeptic besides MF and myself read this blog.

    Off-topic rant: if Sumner goes mainstream, it would essentially mean the end of the ‘mystique’ behind the US dollar. There would be a run on the dollar IMO, and the J. Connelly “deficits without tears” philosophy that comes with a cheap dollar that is nevertheless the reserve currency of the world (and thus artificially higher in value than it logically should be) would come to an end. It would cause all those dollars–the vast majority are held outside the USA–to come flooding back to the USA, which would cause inflation. It would be the end of the dollar, and the US economy. Small wonder then I doubt anybody anytime soon will adopt NGDPLT, unless we have another depression and people are willing to try anything.

  27. Gravatar of ssumner ssumner
    31. January 2015 at 10:33

    sdfc, You said:

    “The correct calculation for GDP in any particular calendar year is of course the whole of year number which was in fact 2.4%, up from 2.2% in 2013.”

    Not if the shock occurred on January 1st, then you use Q4 over Q4 data. Even my Keynesian opponents generally agree on that point. Even the CBO uses Q4 over Q4.

    If you used calendar year over calendar year you’d have 2013 growth rates heavily impacted by the rate of growth in the second half of 2012, before austerity occurred! Why would you want to do that? Again, I’m using the standard procedure for a shock that occurred at the beginning of the year, this isn’t even controversial among economists.

    Here’s a thought experiment. Imagine a time series that rose steadily all 365 days of 2012, ending the year 36.5% higher. Thus it rose about 0.1% per day, ignoring compounding. Now assume it fell at the same rate over 2013, ending the year at the same point as at the beginning of 2012. On a graph it looks like a perfect mountain, up then down. With the peak at the beginning of 2013. Do you realize that by your and Ray’s prefer method, the growth rate in 2013 would be zero? So a shock that occurred on the first day of 2013 would have seemed to have had no effect? That obviously makes no sense.

    So . . .

  28. Gravatar of Ray Lopez Ray Lopez
    31. January 2015 at 19:25

    @Sumner–fine, you win. But you could have avoided all this controversy with a few lines explaining this in your original post.

  29. Gravatar of sdfc sdfc
    31. January 2015 at 21:59

    Hi Scott

    Your thought experiment doesn’t make a lot of sense. If the economy was growing at 0.1% a day in 2012 and then shrank 0.1% a day in 2013, then clearly the 2013 shock has had an effect.

    You seem to be confused between stocks and flows.

    Now back to 2012 and 2013. Using Q4/Q4 for 2013 means the rate of growth is heavily impact by the rate of growth in Q4 2012. Q4 2012 growth was just 0.1%, weighed down by a 1.95ppt negative contribution from non-farm inventories. The negative contribution from inventories in Q4 2012 pumps up the 2013 Q4/Q4 calculation.

    There is nothing special between Q4 when compared to the first three quarters in calculating calendar year growth.

  30. Gravatar of Ray Lopez Ray Lopez
    1. February 2015 at 01:48

    Upon reflection, I adopt the reasoning of sdfc, and retract my statement that Sumner won. Like Al Gore, I conceded victory too soon.

    Now having said that, it’s true that if you look at a graph of QE and the US stock market, as well as US GDP per capita, you’ll see that indeed it seems that the stock market responds to QE, and that the economy is flat when QE is flat (e.g., yr 2010). But the natural question is that even if this effect is true, when do you stop QE? Are you to posit that QE must continue forever for the economy to continue growing? That’s not a thriving economic plan, that’s keeping a corpse on life support. I personally think it’s just coincidence that QE causes these effects, nothing more. But if I’m wrong, the implications are very deleterious for the US economy.

  31. Gravatar of ssumner ssumner
    1. February 2015 at 09:04

    Ray, I’ve explained this point too many times to count.

    sdfc, I have no idea what you are getting at here. 2012Q4 growth obviously has no bearing on 2013. But it really doesn’t matter, no matter how you measure things growth did not slow in 2013, it sped up, it’s just a question of how much, and is it significant. It may well not be a significant speed up in growth, but the Keynesians needed a predicted a slowdown.

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