What a difference a quarter makes

Real GDP growth was a surprisingly strong 4.1% during the 3rd quarter.  During the third quarter, however, lots of people were quite pessimistic:

Here’s a fairly typical story that appeared about 2/3rds of the way through the 3rd quarter:

The meager increase in consumer spending in July has quashed any optimism generated by faster second-quarter U.S. growth.

A handful of Wall Street firms chopped their growth targets for gross domestic product in the third quarter after the government reported Friday morning that spending rose a scant 0.1% in July, based on a preliminary estimate.

RBS slashed its prediction for GDP growth to an annualized rate of 1.5% from 2%; Macroeconomic Advisers cut its projection to 1.6% from 1.8%; Barclays trimmed its forecast to 1.6% from 1.9%; and Morgan Stanley reduced its estimate to 1.9% from 2.1%.

Now suppose you were a liberal Keynesian who was convinced that austerity was madness.  How would you react to this sort of story?  Clearly you’d want to go on record emphasizing the importance of fiscal austerity, and the damage that was being done to the economy.  That way you could say “I told you so” when the dismal 2nd half data came out.  And in October (before the actual 2013:3 GDP data was available) Paul Krugman did exactly that, suggesting that the conventional measures of austerity left out a great deal :

But we shouldn’t stop there, because there are two important aspects of the story that MA leaves out.

First, part of the fiscal cliff deal involved letting the Obama payroll tax cut “” a significant, useful form of economic stimulus “” expire. (Republicans only like tax cuts that go to people with high incomes.) This led to a surprisingly large tax hike in 2013, focused on workers:

Second, GOP opposition to unemployment insurance has been the biggest factor in a very rapid decline in unemployment benefits despite continuing weak job markets:

This hurts the unemployed a lot, but it also hurts the economy, because the unemployed are already living on the edge, and surely must have been forced into spending cuts as benefits expired.

The combination of the payroll take hike and the benefit cuts amounts to about $200 billion of fiscal contraction at an annual rate, or 1.25 percent of GDP, probably with a significant multiplier effect. Add this to the effects of sharp cuts in discretionary spending and the effects of economic uncertainty, however measured, and I don’t think it’s unreasonable to suggest that extortion tactics may have shaved as much as 4 percent off GDP and added 2 points to the unemployment rate.

In other words, we’d be looking at a vastly healthier economy if it weren’t for the GOP takeover of the House in 2010.

Yes, unemployment would be 4.7% w/o the GOP takeover.

BTW.  That horrible GOP takeover led (in 2011) to the 2% payroll tax cut that Krugman thinks was “useful.”

The White House is counting the 2 percent payroll tax cut among its “wins” in the tax deal worked out with congressional Republicans. But it’s a win based on a Republican idea and one that many congressional Republicans support.

You may recall that a payroll tax break or “holiday” was a Republican proposal back in 2009. Conservatives liked the idea then in lieu of a tax credit.

.  .  .

In 2009, the White House rebuffed the idea, preferring its grab bag of stimulus spending programs.

Remember the boost to GDP after payroll taxes were cut in 2011, and the decline after they were raised again?  Neither do I.

PS.  Just to be fair and balanced, I think the stronger growth in recent quarters also undercuts the “it’s not demand it’s Obamacare” story put out by conservatives.  In fact it’s both, but in the short run demand is the dominant factor.

HT:  Thanks to Erik Trygger



7 Responses to “What a difference a quarter makes”

  1. Gravatar of Mark A. Sadowski Mark A. Sadowski
    12. January 2014 at 11:08

    There’s also some good news from the early data out of the fourth quarter.

    In particular real PCE rose at an annual rate of 5.0% in October and 6.4% in November. That’s up from 1.3%, 3.0% and 2.6% in July, August September. And of course PCE accounts for 68% of GDP:


    Furthermore, although inventories rose strongly in 2013Q3, and usually that’s a bad sign for subsequent quarters, business inventories rose more in October than they did in July, August or September.

    And although capital goods shipments are volatile, and so should be taken with a grain of salt, they soared in November:


    Note that capital goods shipments are highly correlated to the equipment component of private fixed investment.

    So it would seem that the fourth quarter RGDP report may be better than many are expecting.

  2. Gravatar of benjamin cole benjamin cole
    12. January 2014 at 12:36

    Print more money.

  3. Gravatar of Morgan Warstler Morgan Warstler
    12. January 2014 at 14:46


    Those are really interesting numbers.

    Looking at PCE it looked a bit different, so I zoomed out back to 2007, is there some reason why PCE would have less monthly volatility recently?

    It’s early, but looks like it doesn’t heartbeat as much as it has in recent history.

    Is that some wonky change in measure? Why would PCE bounce so damn much?

  4. Gravatar of Mark A. Sadowski Mark A. Sadowski
    12. January 2014 at 15:57

    It probably appears volatile just due to the fact that it’s high frequency data (monthly). On a quarterly basis real PCE is the least volatile major component of RGDP. I have no idea why monthly real PCE appears less volatile recently.

  5. Gravatar of Saturos Saturos
    12. January 2014 at 18:49

    I despair for the mind of Krugman. (But Ireland doesn’t.)

  6. Gravatar of Saturos Saturos
    12. January 2014 at 19:24

    What is Neo-Paleo-Keynesianism?

  7. Gravatar of ssumner ssumner
    13. January 2014 at 04:46

    Saturos, I didn’t like the original paleo-Keynesianism, although in fairness Farmer’s versions sounds less bad.

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