Tag Archives: Shutdown

Today’s Economic Report Card

This has been an eventful week in economic news. This morning, we got a first, early look at US economic growth in the fourth quarter of 2013—and it proved a pleasing sight. The economy grew at a 3.2 percent annual pace. That was down from a 4.1 percent rate in the third quarter, but both numbers are the best we’ve seen in almost two years. These figures are interesting in their own right, but they also cast a revealing light on some big economic controversies of the last year, such as the government shutdown, fiscal austerity, and the Federal Reserve’s taper.

The period in question covers the government shutdown and debt debates of early October. Those antics, which were forecast at the time to be devastating for the economy, seem only to have had a marginal effect. Today’s numbers included a calculated impact of the shutdown—0.3 percent. That seems to suggest that, absent the shutdown, growth would have been 3.5 percent in the quarter. In fact, the underlying story is a bit more interesting. In a note, the Commerce Department says that it cannot quantify the effects of the shutdown. It generates the 0.3 number by looking at the reduction in federal labor services (employees not coming in to work). Since those workers were eventually given back pay, the note says it ultimately modeled the effect as “a temporary increase in the prices paid for federal employee compensation.” Qualitatively, at least, this bears some resemblance President’s proposal to raise the minimum wage for federal contractors, though that change is meant to be permanent. In retrospect, October’s predictions of catastrophe seem overblown.

Today’s report also covers a period in which the US government engaged in fiscal austerity. If one compares government budget numbers in the fourth quarter of 2012 to the fourth quarter of 2013, we saw a decrease in spending (from $909bn to $838bn, a 7.8 percent drop); we saw an increase in tax receipts (from $616bn to $665bn, an 8.0 percent increase); and a resulting decrease in the quarterly deficit (from $293bn to $174bn, a 40.8 percent drop). And yet the economy grew substantially faster (growth in 2012:4 was just 0.1 percent). Of course, these numbers hardly suffice to confirm or reject Keynesian claims about how one spurs or slows the economy. Multiple factors play into economic growth and some of those factors are not contemporaneous—they can kick in with a lag, or they can even work in advance, when people change their behavior based on expectations of future changes. But these numbers, on their face, certainly do not lend strong support to the assertion that a smaller government role dooms the economy to stagnation.

Before today’s GDP report, the big economic news of the week was the Federal Reserve’s decision to continue with its “taper”—the program of cutting back by $10bn per month in the amount of money it pumps into the economy (quantitative easing). In both the case of GDP and that of the Fed, the news came exactly as forecast by market watchers. The Fed had to act first, without the benefit of the GDP report. It proceeded in spite of some pressure to reconsider. The December jobs report, released earlier in the month, had been surprisingly weak. Further, if the Fed looked abroad, the view was more alarming. Emerging markets, along with some major Asian exchanges, have been crashing this last week. Among the explanations that have been offered were the tightening of the global money supply (directly affected by the Fed taper) and weakening growth in China. This highlights the challenge faced by the Fed. Its actions do work with a lag—perhaps 18 months. That means it must react not to current conditions, but rather to its forecasts for years to come. Furthermore, it has really just one tool—the money supply—with which to target domestic prices (inflation), unemployment, plus the well-being of the global economy, and that last one isn’t even part of its official mandate. The problem of getting the timing right led one past Fed chairman to say that the central bank’s job was “to take away the punch bowl just as the party gets going.”

So what hints of the future are there in today’s GDP report? The Bureau of Economic Analysis helpfully breaks down the contributors to GDP growth (Table 2). One of the most striking contributors in the last quarter of 2013 was the importance of international trade for the US economy. Net exports of goods and services accounted for 1.3 percent of the overall 3.2 percent growth. Most of that came from exports growing at an extraordinary 11.4 percent annual rate. Looking ahead, that driver of growth now looks threatened, both with faltering economies abroad (someone has to buy those exports) and an endangered agenda for gaining new market access through trade agreements.

Reading the Jobs Report Card

This was to be the morning when we received the bill for last month’s government shutdown shenanigans. All those who had irresponsibly failed to agree upon a budget by the Oct. 1 start of the fiscal year were to learn what damage they had wrought. How many more Americans would be looking for work because of their inability to find common ground? And the verdict was…

204,000 new jobs in October!  The number was dramatically above forecasts of 125K and above the 190K/month average of the preceding twelve months. This seems the equivalent of partying all night before a test, never cracking open the textbook, and then finding out you got an A on the exam. What gives? Three thoughts below.

1. Approach monthly job numbers with caution
The closely-watched report actually has a margin of error of around 100K jobs. As the economist Justin Wolfers reminds: “There’s a lot of noise…Don’t overinterpret every blip in the data.”

This is not just a technicality. Every release features revisions of past releases. This one was no different: The August employment number was revised up from 193K to 238K, while the September number went from 148K to 163K. So, on top of the 79K unexpected October jobs, it turns out there were another 60K jobs from before that we had not counted on.

2. The “but for” challenge
Numbers such as the jobs release are rarely dispositive in economics. Given the impossibility of running a controlled experiment (“Let’s try October again, this time without a shutdown!”) we are left to speculate about what would have happened “but for” the shock that occurred. To do that, we rely upon models that are often unreliable. There is always room for someone to say: “Just think how high the number would have been without the shutdown!”

The challenge is even more difficult when other policies change. One celebrated prediction of the shutdown’s impact called for 900K jobs lost and the unemployment rate jumping by 0.6 percentage points (it actually stayed unchanged at 7.3%). One mechanism by which such havoc would be wreaked was that interest rates would rise as markets were overcome by fear and uncertainty. And yet the benchmark Treasury 10-year interest rate was roughly 30 basis points lower throughout the shutdown than at its early September peak. Of course, there was a major policy move in the interim: the Federal Reserve postponed its “taper.” There was speculation that, in doing so, it was casting a wary eye on Washington developments. Perhaps so.

But how does one then disentangle the net effect of the shutdown? Should it be the combined effect of the shutdown and postponed taper? It seems unlikely that the Fed would have reneged on its earlier taper commitment had there been a new budget firmly in place for FY2014 and ample room under a new debt ceiling.

3. What did you expect?
With all of the above caveats, there is a deeper question about how markets and the public approach temporary measures.

In an unusual attempt to increase pressure on Republicans early in the shutdown, President Obama gave an interview with CNBC in which he urged markets to worry: “This time I think Wall Street should be concerned…When you have a situation in which a faction is willing to default on US obligations, then we are in trouble.” Presumably the intent was to invoke the wrath of the markets and terrify opponents as indices tumbled.

Markets refused to comply. The S&P 500 actually rose slightly over the first couple weeks of October. That index reflects a huge number of daily transactions, so it would be foolish to give a single reason for the way it moved. But market participants clearly expected that the standoff would be short-lived and that the United States would make good on its debts. Had someone taken the President up on his invitation to panic, they would have ended up selling low and then buying high when the crisis passed. That’s not what they’re there for.

These same questions of expectations and “but for” analyses have bedeviled discussions of stimulus. In a Keynesian approach, the citizenry is first surprised by the burst of government spending, then surprised again later when taxes go up to pay for that spending. In a “rational expectations” approach, citizens are not surprised, nor are they so responsive to policy maneuvers.

Returning to the question of jobs, Paul Krugman has a piece in today’s New York Times in which he laments the staggering cost of persistent high unemployment. In that, he’s clearly right. He then goes on to attribute the unemployment to a lack of greater government spending and the influence of “deficit scolds.” Others would differ sharply in their diagnosis. Today’s job numbers seem to warn against facile analyses and overconfidence that we can pair each act of government with a market response.

Fixing Trade Policy Post-Shutdown

We are just over a week away from the “Frontiers of Economic Integration” conference in Chicago. We will be fortunate to welcome a number of leading trade policy voices from around the world. As much as we can, we hope to feature their work and provide a public forum for discussion here on the blog.

I wanted to kick things off by highlighting the recent work of two participants. Both based in Washington, Dan Ikenson and Claude Barfield are responding to the turbulent recent weeks in US trade policy. Trade was not center stage in the DC fight over the debt limit and government funding, but it was heavily impacted. I make some arguments about the serious implications for advancing trade agreements, particularly the Trans-Pacific Partnership (TPP), over at Foreign Policy.

Dan Ikenson will offer his TPP thoughts at the conference next week. In the meantime, he last week provided a “Roadmap for Success” for the US negotiations with Europe, the Trans-Atlantic Trade and Investment Partnership. He emphasizes the need to develop a realistic set of goals for the negotiation and to try for a series of three agreements, rather than a single grand bargain.

Claude Barfield says it is crucial, in the wake of the Washington tumult, for the Obama administration to turn full attention to concluding the TPP. He puts this argument in the broader context of US relations with Asia. At the conference, Claude will be demonstrating another facet of his expertise, speaking on intellectual property issues in trade. He  wrote about those issues last month, in a piece on “Sorting out the high-tech patent mess.” That was in the wake of the US Trade Representative’s decision not to block the import of iPhones over a patent-infringement claim.

More voices from the conference and the world of trade policy soon to come.