Thursday, November 29, 2012

A Second Look at Third Quarter GDP

This morning, the government released revised estimates of third quarter GDP.  Though the headline number looks good (by today's standards!), there's less than meets the eye (no, I'm not trying to be negative).  Economic growth was revised up from 2% to 2.7%.  However, growth in consumer spending was revised down from 2% to 1.4% and business investment declined by 2.2%, its worst showing since 2009 (led by the first decline in investment in equipment and software since the end of the recession).  So why was economic growth revised upward?  Higher government spending, more inventories, and fewer imports (due in part to weaker consumer spending).  Private demand (i.e, excluding inventories and government spending) rose by 1.26%.

So what's the takeaway?  The economy continues to move forward, but slowly.  Consumer spending was sluggish in the spring and summer while business investment has weakened considerably.  The combination of rising inventories and modest consumer spending suggests limited production in the coming quarters as businesses seek to trim their inventories to get them back in line with sales.  Most forecasts estimate that the economy will remain sluggish through the middle of next year, growing by between 1.5 and 2% in the fourth quarter and between 1% and 2% in the first quarter of 2013 (see my forecast page).  Of course the what happens to the fiscal cliff will have a lot to say as to the direction of the economy as we enter 2013.  Given the likelihood of the end of the payroll tax cut, which will result in a 2% tax hike for most Americans beginning in January 2013, consumer spending will remain sluggish at best in the coming months.  Are there any bright spots?  Believe it or not, residential investment has grown by 13.7% in the last 12 months (from a depressed rate) and is now the fastest growing segment of the economy.

Sunday, November 11, 2012

Taxes and the Fiscal Cliff

I'm planning a series of posts regarding the fiscal cliff, but Greg Mankiw recently posted a link to a study by the Tax Policy Center (joint project of the Urban Institute and Brookings Institution; both normally condiered center-left institutions) which examined the impact of limiting tax deductions.  For those who listened to the campaign closely, this was part of Mitt Romney's tax reform proposal (lower the tax rates and limit the deductions; he mentioned figures between $17,000 and $25,000).  For new readers of this blog, lower tax rates provide for a higher after-tax rate of return on working, investing, and saving, thus leading to more of each (how much of an impact is subject to some debate).  Given that Mitt Romeny lost, his tax reform proposal won't be implemented, but instead of allowing the Bush tax cuts to expire on those earning above $250,000 per year, taxes can be raised by limiting tax deductions.  One of the chief proponents of this approach is Martin Feldstein, chair of the Council of Economic Advisots for President Reagan.  He, and many other economists, refer to most tax deductions as tax expenditures.  Why?  the government can subsidize a certain activity by spending money on it or by allowing individuals to deduct it from their taxes (here are commentaries from Feldstein in the WSJ and NY Times).  So there's some agreement between those on the right and left about reducing tax expenditures (limiting tax deductions) as a way of achieving more government revenue.  According to the study, limiting tax deductions to $50,000 per year would raise over $700 billion over the next decade with 80% being paid by the top 1% (this assumes the Bush tax cuts are extended for all income levels, including those earning over $250,000).  Thus, President Obama could get his tax hike on the rich while Republicans can extends the Bush tax cuts and keep tax rates at their current level.

Friday, November 2, 2012

October Job Report

The October job report presented some good news mixed with some not so good news.  At first glance, I thought the report was quite positive, better than the report for September.  But didn't the unemployment rate rise in October (now at 7.9%) while it declined in September (from 8.1 to 7.8%)?    As discussed in last month's post concerning the job market, last month's decline wasn't supported by the other data within the report or elsewhere.  This month's report had several positive points.  The private sector added 184,000 jobs in October after adding an upwardly revised 128,000 in September.  Job creation was spread across many sectors, which is a good sign.  Of course calling job gains of 184,000 good shows how low expectations have been set.  More good news can be seen in the household survey which reported an increase in the labor force participation rate as well as more job creation.  The employment-population ratio rose to 58.8%, the highest since August 2009, still down from over 63% prior to the recession.  So the headlines from both surveys used to estimate the state of the job market were positive.

What's the not so good news?  The index of aggregate hours worked (see table B9 - production and nonsupervisory workers) declined slightly (another measure of aggregate hours worked increased slightly).  Looking at more details by industry (table B2), it looks like there were small declines in weekly hours worked for various industries.  Though the establishment survey (used to estimated nonfarm payrolls and hours worked) doesn't distinguish between part-time and full-time employment, the increase in employment accompanied by a small decrease in average weekly hours suggests many of the new hires are part-time workers.  The household survey does distinguish between part-time and full-time employment and indicates that about one-third of the jobs created based on its survey were part time (table A9).  In addition, average hourly earnings declined slightly and is now up 1.6% over the last 12 months, which means real hourly earnings (i.e., after adjusting for inflation) are flat (since consumer inflation is running at about 1.7% (according to the PCE index).

What's the takeaway?  It was a pretty good report overall, showing more job growth spread across many industries and more people returning to the job market.  However, the weakness in hours worked and hourly earnings are reasons for caution.  In addition, emloyment gains seem to be outpacing other indicators of the economy including GDP (which rose by 1.3% and 2% in the last 2 quarters, respectively) and business investment (which is been sluggish of late).