Growth in 2017

The 4th quarter GDP numbers were just released.  Here is how I’d summarize the data:

Growth from 2016:Q4 to 2017:Q4 = 4.4% nominal and 2.5% real

Growth from 2015:Q4 to 2016:Q4 = 3.4% nominal and 1.8% real

So what do we know about this data?

1.  Monetary policy was more expansionary during 2017.  That might explain both the increase in inflation and the increase in real growth.

2.  My hunch is that monetary policy alone does not fully explain the increase in real growth, just most of it.

3.  The rest of the increase in real growth is due to some combination of faster global growth and policy changes in the US.

Here’s my guesstimate.  Of the 0.7% rise in RGDP growth, I’d guess 0.4% was monetary stimulus (i.e faster NGDP growth), and 0.2% was global growth, 0.1% was deregulation, and o.1% was expectations of corporate tax cuts.  Yes, that adds up to 0.8%, but I think there was also a 0.1% drag on growth caused by the US approaching full employment.

I think corporate tax cuts will add about 0.2% to 0.3% to RGDP this year.

I don’t have high confidence that any of these numbers are precisely right (and the data itself may be revised), but I do think they are in the ballpark.

PS. I have a new post at Econlog pointing out that monetary policy in 2017 was nearly perfect.

PPS.  Hypermind currently forecasts 4.3% NGDP growth from 2018:Q1 to 2019:Q1.  My hunch is that it will come in just below 4%.  I’m sticking with my frequently made prediction that this will end up being  the longest expansion in US history.




22 Responses to “Growth in 2017”

  1. Gravatar of Fred Fred
    26. January 2018 at 09:57

    Professor Sumner,

    Admittedly, when before I saw your Econlog post, I thought your argument was going to be that NGDP around 4 or so percent represents sufficiently expansionary monetary policy. The way you framed it is very interesting. I found myself disagreeing with you until I realized that you were making two very important points. (Let me know if I’m misinterpreting you in this respect.)

    1. The Fed does not have an NGDPLT regime in which we wouldn’t even talking about targeting unemployment and inflation a ‘dual’ way, but only whether monetary policy was sufficient–I think the words ‘tight’ or ‘loose’ might sort of be beside the point here–to generate X’s percent NGDP. In this case, your framing of the issue is quite right.

    2. The forecasts the Fed releases are, for all intents and purposes, implicit policy targets. Even if the Fed moves those goalposts throughout the year, as if typical–mostly downward, as with inflation–because they control NGDP, they can over any meaningful horizon control its evolution. “Forecasting” 4.6 percent unemployment when they could probably forecast, say, 4 percent or 5 percent is for all intents and purposes constructing policy so as to achieve this goal–I believe this is how FRB/US works in terms of simultaneously forecasting the funds rate and unemployment/inflation. Stan Fischer gave an excellent speech on it a while back.

    With that said, I’m interested if you’d be willing to elaborate on your point that monetary policy was more expansionary this year than last. Surely the ex-post NGDP numbers suggest that (I’m making the assumption that you’re arguing on this basis), and I agree with your argument (and Bernanke’s) that this is a far better way to measure the stance of monetary policy than, say, interest rates. But it seems to me that not much has especially changed this year relative to what the Fed had forecasted. I could be wrong on this, but I believe they carried out precisely the number of rate hikes they forecasted a year ago. Aside from that, not much else changed with respect to guidance or the balance sheet that differed from what we expected. I don’t want to get trapped in the ‘concrete steps’ mindset, but it seems rather difficult to pinpoint something, other than the realized numbers, what really changed. I know you don’t quite accept the ‘policy lags’ narrative, but one might be able to argue along such lines that this represents a lagged effect of past years of policy. Also, if NGDP expectations are the best indicator of the policy stance, they’d likely do a better job than the ex-post numbers at explaining the evolution of the Fed’s policy stance. The Fed’s NGDP forecasts at the very least haven’t much changed, though I’m not too sure what Blue Chip or SPF or some other metric for this might have to say on the matter.

  2. Gravatar of ssumner ssumner
    26. January 2018 at 10:19

    Fred, You clearly understand this stuff, but I don’t think you’ve fully internalized just how useless the “concrete steppes” really are.

    You can think in terms of expected monetary policy (expected NGDP) or actual monetary policy (actual NGDP). Either way, the concrete steps are simply meaningless.

    What “changed” is the position of the Fed’s interest rate target relative to the natural rate. Now let’s say that the rise in the natural rate was due to “real” factors, (say optimism about Trump.) That would still have led to a more expansionary monetary policy, if not offset by an equally rapid rise in the target rate. And obviously we did not get an equally rapid rise in the target rate. Hence monetary policy effectively became more expansionary.

  3. Gravatar of John Hall John Hall
    26. January 2018 at 10:53

    Econlog seems to be down for me right now.

    If you regress the log NGDP on a time trend since Q4 2009 it’s about a 3.7% annual pace. So the 4.3% pace in 2017 is a little faster than the recent average. However, 2015 and 2016 were below average, so it’s a little bit of a catch up.

    Of course, this ignores the question of why use 3.7% instead of the earlier 5% average trend line. And why not catch up to that previous pace.

  4. Gravatar of Marcus Nunes Marcus Nunes
    26. January 2018 at 11:06

    On a “record beating expansion”: Drive slowly, grow longer!

  5. Gravatar of Alec Fahrin Alec Fahrin
    26. January 2018 at 16:35

    I am not sure what data point Sumner is referencing, but my data says that the economy grew 2.3% in real terms during 2017. 2.6% annualized, but 2.5% annual growth from Q4 2016 to Q4 2017.

    So 2.3% growth seems more relevant for “2017.”

    Not sure…

  6. Gravatar of E. Harding E. Harding
    26. January 2018 at 16:42

    I actually wouldn’t attribute much to non-monetary policy at all; the extreme productivity stagnation since 2011 has simply been abnormal, and it was going to begin to end regardless of who the President was.

  7. Gravatar of B Cole B Cole
    26. January 2018 at 18:29

    Monetary policy is too tight.

  8. Gravatar of Steve F Steve F
    26. January 2018 at 19:19

    What causes the difference between the change in the aggregate stock price and the change in ngdp?

  9. Gravatar of ssumner ssumner
    26. January 2018 at 19:47

    Marcus, Yes, it’s not a very impressive expansion, even though it’s a long one.

    Alec, I used Q4 to Q4 figures, which are more meaningful.

    Steve, Lots of things, not well understood. One is certainly the share of GDP going to domestic corporate profits. Another is overseas profits of US companies. Another is real interest rates.

  10. Gravatar of Matthew Moore Matthew Moore
    27. January 2018 at 01:20

    Did you see the UK GDP figures? Is there any consensus about why predictions of a post-Brexit-vote recession were so badly wrong?

  11. Gravatar of Jesper Jesper
    27. January 2018 at 10:13

    This summation of 2017 is interesting. It would also be interesting to contrast your view of 2017 with 16, 15, 14, 13 and 12. I am a bit surprised you put so much stock at monpol for 2017 when the FED has clearly tightened policy and the global economy has clearly improved. In general, it is hard to judge your 2017 assessnent without knowing the same assessment for the last 5-10 years. I don’t know if you have done this in real time for previous years ( which one would need to actually evaluate your statements) but even an ex post summary would be useful.

  12. Gravatar of ssumner ssumner
    27. January 2018 at 14:17

    Matthew, I doubt there is a consensus, but I think the answer is obvious. Most recessions are caused by tight money, not real shocks.

    I do think Brexit will slightly slow growth, but that’s another story.

    Jesper, I use NGDP growth as the stance for monetary policy, which means policy was eased in 2017, not tightened.

    Don’t make the mistake of using interest rates, which are not a reliable indicator of tight money.

  13. Gravatar of JMCSF JMCSF
    27. January 2018 at 15:47

    Hi have a question on minimum wage increases. Many economists expect an increase in the minimum wage to increase the unemployment rate and possibly lower the overall wages of those making minimum wage.

    What would happen in a time like now where we are near full employment and inflation was consistently failing to meet the Fed’s own target? Would this be the least worse scenario to increase the minimum wage? What would happen if the Fed countered with a more expansionary policy?

    Many (all?) on the left seem to favor an increase in the minimum wage, however I haven’t seen any think about it from this perspective.

    Also I know almost nothing about economics but I love your blog!

  14. Gravatar of Don Don
    27. January 2018 at 19:11

    Someone remind me, how do we know that monetary policy was looser last year?

  15. Gravatar of ssumner ssumner
    27. January 2018 at 21:59

    JMCSF, It’s never a good time to raise the minimum wage and always a good time to abolish the minimum wage. It is true, however, that the loss of jobs will be less when the labor market is very strong, like right now.

    I don’t think it makes much sense to worry about how the Fed would respond to an increase in the minimum wage, in the long run that’s a minor factor. Higher minimum wages will harm the economy regardless of what the Fed does.

    Don, NGDP growth accelerated.

  16. Gravatar of The Original CC The Original CC
    28. January 2018 at 07:56

    Dumb question: If RGDP growth was 2.5% last year, then to compute per capita RGDP growth, we’d have to subtract off population growth, right? So per capita growth was only about 2.5% – 0.7% = 1.8% last year. And that was considered a good year.

    So is real growth only going to be around 1%-1.8% for the foreseeable future? This translates into something like a 40-70 year doubling time, which seems depressing to me.

  17. Gravatar of Benjamin Cole Benjamin Cole
    29. January 2018 at 02:30

    “China’s Communist Party extends reach into foreign companies

    [BEIJING] American and European companies involved in joint ventures with state-owned Chinese firms have been asked in recent months to give internal Communist Party cells an explicit role in decision-making, executives and business groups say.

    It is, they say, a worrying demand that threatens to put politics before profits, and the interests of the party above all other considerations. It suggests that foreign companies are no longer exempt from President Xi Jinping’s overarching vision of complete control.”


    The Business Times is a Singapore-based publication. The story gets darker and darker as you read it.

    Trump is a half-wit Peter Pan compared to President Xi–although Trump may actually be the better leader.

  18. Gravatar of John Papola John Papola
    29. January 2018 at 07:30


    Does the acceleration of inflation in the face of rising real GDP cause you any alarm that we may be experiencing a bit of a pro-cyclical monetary ease that could induce a boom-bust cycle?

    Shouldn’t increasing real GDP put downward pressure on inflation? I would think that, given any particular growth path of NGDP, the composition of that NGDP would be shifting towards RGDP and away from inflation. I suppose this is technically true in this case. RGDP was 52% of NGDP in 2016 and 57% in 2017. But inflation as higher in 2017 than 2016.

    I share your disdain for bubble-spotting. Still, I can’t help but feel unease that we’re now at the outer limit on the historic time period between recessions, AND it seems like housing is getting a bit frothy (though my view may be clouded by living in Austin, TX).

    Are we in a new Australian normal? Or is this an echo of 2005?

  19. Gravatar of John Papola John Papola
    29. January 2018 at 07:41

    Oops. Missed your PPS about the recovery. That said, I’d still love to hear any more thoughts on why we’re not in the risk of excesses territory beyond the loose joint of inflation and unemployment targets.

  20. Gravatar of Fred Fred
    29. January 2018 at 11:10

    Professor Sumner,

    Could you elaborate a bit more on your prediction that corporate tax cuts will boost RGDP this year? I can’t say that I’m totally sold on this, not because I don’t think well-crafted tax reform could, in principle, boost RGDP by a few tenths (I certainly do), but precisely because this new tax reform is such a mixed bag. I’m not normally one to believe in Ricardian equivalence, but the future tax hikes are actually in the bill this time — we don’t even need to draw on rational expectations here to see that these tax hikes will almost surely go into effect in the long term, irrespective of whether they were there initially as a political tactic (passing the bill through budget reconciliation with only 51 votes). With that in mind, and the dampening impact of persistent–and growing, with this tax reform–budget deficits on capital formation and investment, might we even say that the negative effects of higher deficits offset any short-term decisions by companies to invest? It seems to me like it provided a slight boost to expected AD in the short term, which will almost surely result in tighter money (people on the Fed are already basically saying this), but with almost not conceivable long-run effect.

    This comment is a bit all over the place, I admit, but I think it could perhaps be summarized by this. I think the tax cut could boost RGDP through either the supply-side (capital formation/investment angle) or the AD side. The AD side will almost surely be offset by tighter monetary policy, but the AS side will probably be offset, or maybe even more than offset, by higher deficits.

  21. Gravatar of ssumner ssumner
    29. January 2018 at 11:23

    The Original, I expect even slower growth than that, but consider even 0.8% growth per capita to be quite good—after all, America is already a fabulously rich country, and getting richer. How’s it bad news if the rate of improvement is low?

    John, I think you make a good argument, but I’d say it’s a matter of degree. The scale of growth speed-up that we saw last year was comparable to two or three such previous episodes during the recovery. Yes, in principle when both inflation and RGDP growth accelerate at the same time there is a danger of overheating, I’m just not sure the speed-up was significant enough to worry about. But’s it’s something that we need to watch; the balance of risks is gradually shifting from too little NGDP to too much.

    Fred, I agree that tax cuts won’t do much for AD, for the reasons you suggest. But I do see the corporate rate cuts as semi-permanent, and think they will boost the supply-side enough for a few tenths of one percent more growth. I agree that the higher deficits are a long term problem, but don’t think they fully offset the supply-side effects in the short run. They may be addressed by some combination of spending cuts or more likely by higher taxes that are less distortionary than the 35% corporate rate.

  22. Gravatar of Justin Justin
    31. January 2018 at 14:59

    I for one want to thank you Scott for your role in getting these juicy contracts on Hypermind. Untrained market, free lunch and sweet, sweet action!

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