NGDP growth and interest rates

NGDP growth in Q1 came in at 3.8%, a bit less than expected. As a result, bond yields declined. Indeed NGDP growth has been slowing ever since hitting a peak of 7.6% in 2018:Q2.

One word of caution. Due to the government shutdown this data is likely to be revised—statisticians were missing some trade data. The 0.6% GDP inflation rate seems a bit odd, perhaps it will also be revised. Year-over-year data is probably more reliable.

The media focuses on RGDP, which came in higher than expected, but it’s NGDP that drives interest rates in the long run.

Commenters keep telling me that money is too tight, but I see 5.1% NGDP growth over the past 4 quarters. Don’t assume that rising interest rates imply tight money.

The RGDP growth was strong, which is good news for supply-siders. There is a caveat however, some experts say the internals were somewhat weaker, with growth being distorted by transitory factors. Time will tell.

PCE inflation was only 1.7% year-over-year. That’s a problem, and perhaps that signals that money is a bit too tight, but since unemployment is below the Fed’s estimate of the natural rate it’s a fairly small problem.

I expect NGDP growth to continue slowing over time, but given my recent track record no one should take my predictions very seriously. Overall, I think the Fed’s doing a very good job at the moment, but the regime still has serious flaws that may show up if the economy is hit by a shock.

I also see the recent strength as one more nail in the “long and variable lags” theory. In December, forecasters widely anticipated a slowdown in the economy. Then the Fed issued some dovish comments and the asset markets immediately perked up. By March the underlying economic data was also showing increased strength. Monetary policy affects the economy within a month or two. Without the Fed policy adjustment in January, the first quarter would have been weaker.

PS. In other news, Bloomberg reports:

The U.S. and China have agreed on a currency provision in their potential trade agreement, Treasury Secretary Steven Mnuchin said in February. Bloomberg News reported earlier that the U.S. was asking China to keep the value of the yuan stable to neutralize any effort to soften the blow of U.S. tariffs.

China won’t engage in currency depreciation that “harms other countries,” Xi said on Friday, adding the yuan will be kept at a “reasonable, equilibrium level,” and the market will play a bigger role in setting the exchange rate.

Well okay!!

I suspect the Chinese know exactly how Trump retaliated against North Korea when they failed to live up to their promise to denuclearize.

The Bloomberg article was accompanied by perhaps the funniest headline of the year:

China’s Xi Signals Approval for Trump’s Trade War Demand

Trump demands reasonable, equilibrium exchange rates that don’t harm other countries!!

PPS. Who would have expected the most devastating takedown of modern conservatism to be penned by the author of Liberal Fascism?

Whether you call it the party line, right-wing political correctness, or simply a desire to cater to the president’s fragile ego, it’s simply not acceptable to publicly criticize Trump on the right. Prominent religious leaders feel compelled to dismiss Trump’s sordid sexual history. Passionate constitutionalists simply shrug or celebrate Trump’s words and deeds, no matter how contrary they may be to constitutional principles. You have to gush about his genius when there’s little discernible wisdom in what he does, and you must marvel at his courage when there’s none to be seen. Credit for Trump’s wins is all his; blame for his losses is all somebody else’s. . . .

Indeed, the demand that everyone see the emperor’s new clothes is so powerful that criticizing — or even being inconvenient to — the president’s preferred messaging is seen not only as a kind of treason but as proof that the critic isn’t really a conservative at all.

And people wonder why I call it a cult.



15 Responses to “NGDP growth and interest rates”

  1. Gravatar of E. Harding E. Harding
    27. April 2019 at 11:18

    Goldberg (though not a conservative) is correct. It is wise to relentlessly criticize Trump for his a thousand and one actual misdeeds (rather his infinity imaginary ones). Believe me; if I were in Congress, I’d be the biggest Trump critic on the planet.

    “I suspect the Chinese know exactly how Trump retaliated against North Korea when they failed to live up to their promise to denuclearize.”

    Uh…. what are you trying to say here?

  2. Gravatar of Benjamin Cole Benjamin Cole
    27. April 2019 at 19:04

    ‘but since unemployment is below the Fed’s estimate of the natural rate it’s a fairly small problem.” Scott Sumner

    Oh, PU!

    The problem is that the Fed’s estimate of the natural rate of unemployment is way too high, at just under 5%. I wish I was making this up, but Fed staffers in SF have authored tomes to the effect the Fed must get that unemployment rate up! In fact Fed staffers have argued that:

    “In this Letter, we present a new method to estimate the natural rate of unemployment over the past 100 years. The natural rate has been remarkably stable, ranging between 4.5 and 5.5%.”

    You see, Fed staffers have divined the official unemployment rate is like a law of nature (or God), and should always be around 5%, thick or thin, or despite minimum wage laws, the Great Depression, an aging population or despite immigration, or despite any present-day readily observable results!

    How comforting it must be for America’s 150 million employees (who are largely also voters) to know that the Fed has divined that out of every 20 people who want to work, one must be unemployed. It is “natural”!

    I used to think macroeconomics was science, then, well, a social science. Then I concluded the practice of macroeconomics was often politics in drag. But maybe I missed something: Macroeconomics is also faith-based, a religion. The natural, or divine, official rate of unemployment is 5%.

    Our national policy-makers genuflect to higher rates of unemployment. Gadzooks!

    Maybe we see AOC in the White House as soon as she turns 35 (the minimum age under the Constitution).

    Meanwhile, out of every four jobs today taken by an adult, three are taken by someone not previously in the official labor force. In other words, there is a huge untapped labor pool on the sidelines, now being drawn into the labor force, resulting in higher labor force participation rates.

    Higher labor participation rates are a wonderful positive of good economic growth. As are higher productivity and lower unit labor costs. Businesses invest in plant and equipment when demand justifies it. Call it the 1990s.

    This is what macroeconomists should be crowing about.

  3. Gravatar of dtoh dtoh
    28. April 2019 at 02:45

    I know you will disagree, but IMHO the problem you and mainstream economists have is that you are underestimating the ongoing impact of the tax cuts and you’re not seeing the real unemployment rate because you focus too much on U3 and insufficiently on the LFPR. Plus in your case, TDS is impacting objectiveness. 🙂

    That said, the 3.2% increase surprised me a bit also, but.. FWIW the slower growth in spending and the uptick in inventories is anecdotally consistent with what I’m seeing at the micro level. Demand growth was slow in Q1, but extremely strong in April. Will see how that translates into the Q1 revisions and the Q2 number.

  4. Gravatar of BC BC
    28. April 2019 at 03:01

    RGDP growth up, inflation low, unemployment low, NGDP slightly low. Doesn’t this all point to a positive supply shock (RGDP up, inflation and unemployment low) combined with perhaps slightly tight AD/monetary policy (NGDP slightly low), with the positive supply shock being the most dominant? What would be the positive supply shock, tax reform and deregulation?

  5. Gravatar of Michael Sandifer Michael Sandifer
    28. April 2019 at 04:19

    I will be more surprised than not of the inflation figure isn’t revised up. If we get some above 2% inflation for long enough , it could help test my pseudo-multiple equilibrium hypothesis. If unemployment sustainably begins to fall again, it’s at least consistent with the model.

    Otherwise, conventional macro will be looking pretty good on this point.

  6. Gravatar of ssumner ssumner
    28. April 2019 at 08:41

    dtoh, I agree that I previously put too little weight on the LFPR. I missed that change. (Ditto for Japan, where employment growth has surprised me.)

    As for TDS, I have been predicting a new normal of slower growth for at least 6 or 7 years, in this blog. I doubt those predictions were in anticipation of Trump. Unlike most economists, I’ve argued the corporate tax cut did boost the supply-side. Most others focus only on the demand-side of the stimulus.

    BC. NGDP growth has sped up in recent years, and is 5.1% over the past year. So I don’t agree with your “NGDP slightly low”. I do agree that we’ve had a positive supply shock. I suspect that it will add about 2% to RGDP over a decade, mostly up front.

  7. Gravatar of dtoh dtoh
    28. April 2019 at 10:39


    I know you anticipated a supply side impact from the tax cut but IMHO you under-estimate it’s ongoing effect. Whenever I have asserted that the tax cut will cause a significant ongoing increase in investment and therefore permanently raise trend growth, you’ve argued that the law of diminishing returns would minimize the growth effect and limit the impact to 2% of growth over 10 years. One or two more quarters of good growth and that prediction will become indefensible.

    Also I’m not sure you’re assertion that you’ve been predicting slower growth for 6 or 7 year is consistent with your recommendations for an NGDP target which was previously 4.5 or 4.8% and was reduced to 4% much more recently than 6 or 7 years ago.

  8. Gravatar of Christian List Christian List
    28. April 2019 at 13:46

    it’s simply not acceptable to publicly criticize Trump on the right.

    So Goldberg is not on the right anymore? What is he talking about?

    Goldberg reminds me of one of these bubble guys who are always predicting the next crisis. He’s been burying Trump so many times now, does it ever stop? At some point Trump will be at the end, no doubt, and I bet then Goldberg will be saying that he always knew it. (No Goldbergbug, you didn’t).

    To be fair to Goldberg: You deliberately skipped his entire first argument to make it look worse than it really is.

  9. Gravatar of Brian Donohue Brian Donohue
    29. April 2019 at 05:48

    Yup. Two cheers on Fed policy.

    And yup, #NeverTrump neocons are in the wilderness, talking amongst themselves.

  10. Gravatar of ssumner ssumner
    29. April 2019 at 09:35

    dtoh, If you go back about 5 years, you’ll see a number of posts suggesting that 3% will be the new trend rate of NGDP growth. I’ve actually raised that estimate since Trump took office. The 4% figure is due to the fact that we no longer need catchup from the Great Recession, and also because the Fed estimates 2% as trend RGDP growth. So if one wants to sell the idea to the Fed and other economists, it helps to reassure them that 2% inflation will continue under the new regime. I’d be happy with 5%, or 3.5%, any reasonable figure.

    And you are wrong, I advocated a 4% growth target long before Trump took office, at least as far back as 2015:

    As far as the growth impact of the tax cuts, it’s way too soon to form an estimate. Some of the recent growth surge is due to higher NGDP growth, not supply side effects. I’m sticking with 2% until I see more data. This actually makes me an optimist, as most economists would cite smaller figures. Keep in mind that growth averaged 5% during the 5 years that LBJ was in office, with really high marginal tax rates. Estimating these things is harder than simply drawing lines on a graph. But yes, so far the growth effects seem stronger than Trump’s critics expected.

    Brian, We’ll look back on this era the way we look back on the McCarthy era of the 50s. Joe McCarthy’s conservative critics were the only ones to come away with their dignity intact. A truly disgusting spectacle. (Of course the 1950s left also looks awful, for other reasons.)

  11. Gravatar of dtoh dtoh
    29. April 2019 at 11:11


  12. Gravatar of dtoh dtoh
    29. April 2019 at 11:19


    1. There should be some optimal rate of inflation. We know too little is bad and we know too much is bad so if it’s not a step function then there is an optimal rate of inflation which means there is also an optimal NGDP target equal to trend RGDP plus optimal inflation.

    2.Nominal rates under LBJ were high, but effective rates were lower than pre-Trump tax cut. Even Picketty says that LBJ era effective marginal tax rates were in the mid-20s. Other have them in the mid-teens.

    3. You continue to underestimate the effect of asymmetric pre-tax investment returns on the effective tax rate (and therefore after tax returns.) Yes it’s harder than drawing a line…. you have to draw a curve. IMHO though it’s still obvious (at least to me.) If the Fed doesn’t screw things up, it will become obvious to you as well.

  13. Gravatar of ssumner ssumner
    30. April 2019 at 16:01

    dtoh, I don’t agree that the effective marginal rates were low back then. The effective average rates were low, but not the marginal rates. That’s why the wives of rich men did not work. BTW, all the conservative supply side economists that I have read (Laffer, etc.) agree with me.

    There is no optimal rate of inflation. All that matters is NGDP growth rates.

  14. Gravatar of dtoh dtoh
    30. April 2019 at 17:27

    If you believe that trend RGDP is 2.0%, why not set the NGDP target at 2.0%. If there is no optimal rate of inflation, that should work just fine.

    You’re being deliberately naive on effective marginal tax rates. You’re only looking at wage income. Throughout the time time LBJ was president, the maximum statutory rate on capital gains was only 25%. From the standpoint of investment, capital formation and economic growth rates, the tax rate on wages for econ professors and company executives has minimal impact (especially when it’s easy to re-categorize wage income as capital income.)

  15. Gravatar of dtoh dtoh
    30. April 2019 at 17:30

    Also, if the inflation rate an NGDP target rate don’t matter, what caused you to lower your recommended policy rate for an NGDP target from 4.8% to 4.0%

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