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Junkie
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On NPR today an analyst said that the growth was likely a bubble from the consumer, fueled by people receiving their one-time tax checks. The analyst doubted that the GDP growth was sustainable.
So, you basically have a one-time bubble that we have to pay for later when the bill for our record deficit comes due in the future.
Here's a less rah-rah analysis of the numbers from a qualified source
http://www.washingtonpost.com/wp-dyn...2003Oct30.html
Quote:
U.S. Economy: Long-Term Recovery or Short-Term Blip?
Frederick L. Joutz
Associate Professor of Economics, The George Washington University
Thursday, October 30, 2003; 2:00 PM
The economy expanded at a 7.2 percent annual rate in the third quarter. The fastest growth in 19 years was fueled by a surge in consumer and business spending amid tax cuts and low interest rates. Earlier this week, the Federal Reserve signaled that it's inclined to keep rates low for some time to come.
Will the economy be able to sustain its sizzling expansion and when will economic growth translate into job creation? George Washington University economist Frederick L. Joutz was online to answer those questions and more. A transcript follows.
About Joutz
Joutz has been at The George Washington University since 1988. His areas of interest are macroeconometrics, energy economics, time series, and forecasting. He is associate editor for Energy Economics and the International Journal of Forecasting.
Editor's Note: Washingtonpost.com moderators retain editorial control over Live Online discussions and choose the most relevant questions for guests and hosts; guests and hosts can decline to answer questions.
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Frederick L. Joutz: Thank you for joining the washingtonpost.com discussion about the recent GDP data. I look forward to your questions and will try to answer them.
Fred Joutz
Department of Economics
The George Washington University
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Washington, D.C.: Correct me if I'm wrong but this quarter's jump in GDP was driven mostly by personal consumption and business investment. Does this mean that companies are interested in growing once again, thus hiring will pick up?
Frederick L. Joutz: Firms have not begun to respond to the increase in economic activity. They have been in a wait and see mode and drawn down inventories. The increase in personal consumption and business investment is a very good sign. Consumption was driven by durable goods expenditures particularly in the automotive sector. Some of this may have been due to end of year sales.
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Dulles, Va.: The economy has been showing signs of growth for several months, but the general view in the public is that things are still pretty bad. Why the big discrepancy between public perception and GDP?
Frederick L. Joutz: There has been a slight recovery taking place the last 2 quarters. Public perception has been held down by the fact that unemployment is still high, 6.1%, and that until last month firms had not been hiring. There have been a war effect and concerns about future scandals in the financial sector and corporate governance.
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Angers, France: If possible, could you give us some idea of the proportions of the growth for "normal" increase and "war-related", i.e., defense spending. Is this growth being artificially driven by government or tax payer related spending ?
Thank you.
Frederick L. Joutz: The GDP release by BEA today suggests that federal government and defense expenditures were basically flat in the 3rd quarter. Thus, they do not appear to have directly effected the economy.
Defense expenditures did surge by 45% in the 2nd quarter and federal expenditures increased by 25%. Thus government expenditures were important contributors to the 3.3% growth rate in the 2nd quarter. But they have not contributed to the 7.2% released today.
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Annapolis, Md.: Are there historical instances where a strong GDP rate in one quarter failed to play out into longer-term growth?
Frederick L. Joutz: Typically the US economy has experienced rapid growth coming out a recession; the exception was the early 1990s.
There have been instances where the economy has experienced what is referred to as a double dip recession. This occurs when the economy grows for 1-2 quarters after a recession only to fall back into one. There had been concern that the current recovery was weak enough that we could experience another one.
Given the recent employment growth and real GDP growth rate from the last two quarters, I believe the likelihood of the US economy falling back into a recession is slim.
It is always important to not hang your hat or interpret one quarter' or one month's data release on a trend. One should compare where the economy was 6-12 months ago.
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Washington, D.C.: With the globalization of economies, how accurate a read on the health of the economy is gdp these days? I know gdp factors in trade balance but can gdp accurately measure growth of the U.S. economy, if many businesses are multinational and have revenues tied up overseas.
Frederick L. Joutz: The GDP numbers put out by BEA are the best measure we have of broad economic activity. The numbers released today report on the consumption expenditures on durable goods, services, and non-durable goods, business expenditures on plant and equipment including software, computers and IT equipment, government expenditures and the net exports.
The later captures what we are able to sell to foreigners minus what we purchase from them. This past quarter, the US actually narrowed the gap. We have been purchasing far more than we have been able to sell. Exports to the rest of world rose by almost 9% while imports were flat!
This is a good sign. Also, recently the US dollar has depreciated recently against a number of currencies. Eventually this should make US products more price competitive. Of course, this means that imports of foreign goods like beer wine, leather goods, and some automobiles will be more expensive. This could lead to employment growth.
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Washington, D.C.: Do you think the good economic news will result in increased employment and help President Bush's re-election prospects?
Frederick L. Joutz: Higher spending by definition means greater revenues for firms. If they believe that demand is sufficiently strong and will continue, managers will hire more workers.
The strength of the economy is an important factor in presidential elections. Voters translate economic well-being onto their leaders. At this point President Bush's re-election prospects are vulnerable to the fact that the number of full time workers is about 2 million less than when he took office.
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Washington, D.C.: Dear Mr. Joutz,
How much of the 7% growth is actually attributed to government spending? Isn't it true that corporate investment that actually does lead to job creation has still not gained sufficient momentum to bring unemployment down? And in case it does grow in a sustainable manner, how much of it will be fizzled away for servicing the country's growing debt burden?
Frederick L. Joutz: Government spending at the federal state and local level is an important component in overall. Real GDP in 2003 is about $9,800B; government spending is about $1,800 or about 18% of total spending.
Of the later amount about 1/3 is federal spending and 2/3 is state and local.
The federal government helped the 3.3% GDP growth in the 2nd quarter of this year, because it increased by about 25%. However, in the 3rd quarter, federal spending was essentially flat and did not contribute to economic growth
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Louisville, Ky.: The tax cuts and mortgage refinancing had a good hand in today's figures. Once the cuts wear off, and the job situation remains almost static, these figures don't seem to give an accurate picture of how difficult the job situation is. Any possibility that increased GDP will result in new jobs (outside of the lower-paying ones)?
Frederick L. Joutz: Economic growth has been helped monetary policy with low interest rates helping to finance residential construction. The tax cuts have provided some contribution as well - how much is subject to debate.
Employment and the prospect of future employment are crucial to spending decisions by consumers. If firms perceive the economy is going to grow, they will begin hiring more workers.
I do not have the exact numbers, but the number of jobs grew about 60,000 last month. That translates into over 700,000 over a year. The number of people applying for unemployment benefits has fallen from the first 8 months of the year in the 450,000 range to about 370,000 today.
The unemployment numbers are the result of flows of people who are hired in a month, those who lose or leave jobs in a month. If flows in exceed flows out of jobs, then employment increases.
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Bethesda, Md.: Has the Federal Reserve, in cutting rates all the way down to 1 percent, lost its ability to stimulate the economy with monetary policy? And given the GDP numbers released today, are we likely to see the Fed raise rates at its next FOMC meeting?
Frederick L. Joutz: This is the $64 million question.
The Fed has suggested it is willing to keep interest rates low for a "considerable" period at its last two meetings.
The FED policy makers have been concerned about their effectiveness to only control short term interest rates. They have been conducting research on how to affect long term interest rates by purchasing 10 year Treasury securities and the effect this will have on credit markets.
One response to the GDP release today is that the Bond market has reacted negatively. Strong economic growth generally leads to the FED raising interest rates (taking the punch bowl away from the US economy). The credit markets participants are thinking the FED will have a short
"considerable" period.
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Arlington, Va.: Can this news be attributed to anything in particular? For example, the stimulus bill Congress passed earlier this year?
Frederick L. Joutz: I do not think the news today can be attributed to any one factor and would attribute the strong growth to one government action.
Spending increases depend on the confidence of consumers and firms that they will continue to have jobs (and income) and that revenues will come in.
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Poolesville, Md.: At what rate of economic growth can we expect a balance between revenues and expenditures or a balanced budget?
Frederick L. Joutz: We are unlikely to see a balanced budget for several years. The Congress would need to make decisions requiring a combination of reducing tax cuts and reducing spending. I would not be surprised if there is a 2nd term for President Bush, that we will see a tax (or revenue) increase. Yes I am serious
I would check out the Congressional Budget Office web-site www.cbo.gov. They conduct analyses like this.
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Frederick L. Joutz: Thank you for contributing to the forum on the economy. There was not enough time to answer all the questions and go into enough depth.
I have students knocking on my door for office hours and need to answer their questions.
Again, I enjoyed our brief discussion.
Fred Joutz
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