(half a glass of) US Q4 GDP

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You know that bearish sentiment has become passé when the US prints the best quarter for GDP in the last year and a half, and folks are talking it down because it missed forecasts (2.8% SAAR v. mkt 3% SAAR). The main reason that folks are criticising the number is that final sales (GDP less inventories) were a weak 0.8% SAAR, owing to the fact that inventory accumulation added ~200bps to the headline number.

The above chart tells the story – the blue inventory bar is big, and the GDP bar is not much bigger. However, this analysis is too simplistic – there are other interesting stories that are also worth telling.

Without buying into the Ricardian Equivalence / Stimulus debate too much – my view: the Government can alter the utilisation of resources in the short run, but only the allocation of resources in the long run; and because the Government is generally less efficient than the private sector, more Govt generally means lower real incomes – it’s worth noting that the weakness basically comes from a drop in Govt spending, and that for the private sector this is a quarter of robust growth (PCE + Pr Inv was +1.9% SAAR).

Looked at this way, this is the best quality quarter of US growth in some time!

Look at the sustained strength in Personal Consumption Expenditures (PCE).

Excepting Q2 (which was depressed by a fuel tax) consumption has been adding ~150bps per quarter to headline growth (which equates to growth of ~2% SAAR per quarter). What is more impressive is that durable goods (typically the most cyclical component) contributed ~110bps to the PCE result. The weaker pulse of PCE inflation (-160bps to +0.7% SAAR) suggests real income formation should support ongoing consumption growth at around this level.

While the weakness in Q4 Private Investment (contributing +41bps to GDP) is unwelcome, it’s worth paying close attention to the big increase in residential investment (+11% SAAR, contributing 23bps). The reason: housing is the business cycle . As Ed Leamer shows in the linked paper, housing generally causes recession, and robust recoveries without housing are uncommon.

So with residential investment now picking up, and potentially beginning to expand as a proportion of GDP, history suggests that US GDP growth is likely to accelerate over the course of 2012.

p.s. my pick of the recent Ricardian Equivalence blogs by the big gun economist bloggers is John Cochrane’s recent post


  1. Cochrane’s post stimulated a torrent of posts at Scott Sumner’s (here is the first), including retorts from Krugman and others.

    1. thanks – that’s a good post by SS (who i find repetitive at times).

      isn’t most of this debate just an argument between ‘classical’ economists that are trying to point out that the Government does not change resource utilisation in the long run (except via supply side stuff), and the ‘Keynesians’ who i think are arguing that the Government can (and should) do what it can to increase resource utilisation on a temporary basis because of the damaging long run costs of depressed resource utilisation following a crisis?

      to me the debate is typically at cross purposes. IMO the starting point should be that what matters is the quality of Government spending – all that matters in the LR is the rate of return on G. in the SR, the Govt seems able to boost demand, but it doesn’t work for long and it can lower growth if the spending is wasteful – which it typically is…

      1. SS goes further by saying that under inflation- or NGDP-targeting, stimulus doesn’t work much at all even in the SR because the central bank offsets the effect. [Indeed, I wrote a letter to the AFR (which didn’t get published) in response to Quiggin’s ridiculous oped a couple of weeks ago in which he said NGDP-targeting would create ‘more space’ for fiscal stimulus to work.] This is more intuitive in a positive interest rate environment, where most sensible people would agree that the RBA would have cut more in 2008/09 if not for the Rudd/Henry spendfest. SS argues the offset even happens/happened in the US. But I agree that the quality of G matters most of all.

        1. I saw that post of his and thought, doesn’t the monetary authority try and offset all shocks?

          I do not think that sort of rule / logic is unique to ngdp targetting … there is a common thread to it. For that reason, i am quite sure that he is right that if the fiscal authority did less, the monetary authority would do more. i think that is quite a sound argument. The question is – what would more look like, and would it work very well?

          Sent from my iPad

  2. The view that “…the Government can alter the utilisation of resources in the short run, but only the allocation of resources in the long run…” doesn’t necessarily take into account the sorts of public goods that aren’t going to get built/supplied by the private sector. I’m thinking here of the internet, but I’d argue that invstment in public education increases resource utilisation in the LR.

    I do agree, though, with a strong focus on the LR with regard to G. But surely the SR demand-boost is important with rising U (and stable inflation), otherwise resources go unused (not to mention the cost for the folks that comprise that increasing U).

    The BER spending – typically the current narrative for an example of wasted government spending – wasn’t wasteful – the ANAO report doesn’t seem to have been successfully challenged (or properly reported – see here, here and here for some views based on the report that don’t fit the “government expenditure is wasteful” narrative.

    1. what’s wasteful or not depends on the time of the cycle. the IRR always has to higher than the bond rate, but the correct opportunity cost depends on the division of G between diversion and increased utilisation. it’s a hard question.

    2. C’mon, alister, the BER was a crock. Apart from the question of whether it was a good use of taxpayers’ money to build school halls and COLAs in the first place, the fact that private schools got their building done for one-third less than government schools (ie government schools cost 50% more) and Catholic schools did it for 20% less is pretty conclusive evidence that it was a rip-off. The ANAO report focussed on whether the recipients were happy with all the free stuff they got done. What would you expect to hear?

  3. You wil not find many Keynesians wanting to permanently change anything in the LR.

    Remember Keynes’s proposal was ONLY for Depressions because the liquidity trap made monetary policy redundant. If monetary policy is working then fiscal policy is no longer needed.

    Remember also Keynes advocated surpluses in the good times thus debt over the cycle would be negligible.Many critics are not aware of this.
    Cochrane has tied himself in knots as Noah smith has shown.

    on the RE debate David Glasner has been a must read

    1. i tend to think that they all know what they are talking about, and due to the constraints of space focus on the bit that best reflects their assessment of the costs and benefits. i’m sceptical, so i agree with JC in his emphasis. i very much doubt that Cochrane, Lucas, Krugman, or ____ are macro-flunks, as some seem to be claiming. they are all better economists than most, me included!

      1. The point of SS’s torrent of posts was to show that Simon Wren-Lewis of Oxford and Krugman by repetition did actually flunk on one particular contained issue (as did JC in a more minor way). I lost interest after a while, but it’s there if you are keen.

  4. Rajat ,

    if you are gong to refute the evidence that Alister put up at least make an attempt besides saying something that was addressed in the report!

    Just remember in 2008, monetary policy wasn’t working well because banks faced major funding problems even with a government guarantee. There were NO infrastructure projects ready to go, like dual-carriageway from Melbourne to Brisbane, so the government had to make something up VERY quickly. No it does not depend on the IRR but whether we avoided a recession. We did. Very few other countries were as successful.

    Cochrane , as Noah Smith shows, has done a complete about-face.

  5. OYM, I’m not sure what you mean about “addressed in the report”. The overspend on government school projects is on the record. As for monetary policy not working, no spending occurred under the BER until well into the June qtr of 2009 and even that was only $1.5 bn. Technical recession had been avoided by then. Most of the BER’s $16bn+ spending was equally divided between 2009/10 and 2010/11 when it was no longer required. Remember, official interest rates were rising by late 2009 (no doubt in part due to the effect of the BER spending), so the stimulus aspect of the BER was already counter-productive before the vast bulk of the money had been spent.

  6. “ithout buying into the Ricardian Equivalence / Stimulus debate too much – my view: the Government can alter the utilisation of resources in the short run, but only the allocation of resources in the long run; and because the Government is generally less efficient than the private sector, more Govt generally means lower real incomes”

    There’s a problem with your viewpoint – the private sector does not produce enough jobs, so the country is more productive when the government employs people. It’s better than leaving potentially productive resources idle.

    1. perhaps – in my view, the government just transfers resources; it only creates resources if you think the multiplier is >1 (and i do not think it is … except in unusual circumstances)

  7. RA you ask I deliver.


    Use the links above but comparing catholic and public schools is like comparing apples and oranges or wondering why a 3 bedroom house is worth more than a 1 bedroom house.

    you might also learn about how stimulative the program was. Just a thought.

    Stimulus doesn’t work like that in economics.

    If a government spends $100m in 199? from nought it will have a positive effect in the national accounts.

    If it is $50m in the next financial year it has a NEGATIVE effect in the national accounts.

    Inflation had been falling since its peak due to inappropriate spending from Costello when when had capacity constraints ( negative output gap). All interest rates did was rise from abnormally low levels to very moderate contractionary levels due to fears of commodity price boom mark 2.
    These fears thus far have not eventuated.

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