Tuesday, November 13, 2018

Under Construction

Dear friends,

This blog is currently under construction and may remain that way until 2019.

I wish you all the most wonderful holidays and Happy New Year and look forward to reconnecting with you in January.

In the meantime if you would like to discuss global macro just contact me at my email address davidso@indiana.edu

Very best,

Larry




Tuesday, November 6, 2018

The Economy in 2018 and 2019

The US Bureau of Economic Analysis (BEA) reports Gross Domestic Product
on a quarterly basis. The most recent report came out on Friday, October 26. They like to put it out on Friday morning to ruin the weekend for most us. Who said economics is not the dismal science?

Luckily, they perform this ritual only once a quarter. This adds to the excitement – we have to wait three whole months to find out how the economy did. On October 26we found out how much the US economy produced in the third quarter. Tuna – the third quarter is not a football game. It is July, August, and September.

In the October 26 report, we learned that we produced $20.7 trillion worth of goods and services valued at current prices. If we valued that mountain of stuff at constant (2012) prices, we say that Real GDP was $18.7 trillion in the third quarter of 2018. Real GDP is a measure of how much got produced so we usually focus on that amount. The press release reported that the $18.7 trillion was 3.5% higher than in the previous quarter on an annualized basis. It also reported that the $18.7 trillion was 3% higher than in the third quarter of 2017.

Already your eyes are starting to glaze over and you are reaching for your JD. But hold on. This is cool stuff. The 3.5% one-quarter change is a little like the Colts kicking a field goal against the Pats at the end of the third quarter. Since I haven’t told you the full score, you don’t know very much. The 3.5% rate for the third quarter has meaning but it doesn’t tell you enough. The 3.0% is a little more helpful since it is basically telling you how the economy has been doing over a whole year.

But even that isn’t enough if what you want to know is how the economy did in 2018 compared to how it did in 2017. Are we slowing down? Speeding up? For that we have to live another quarter and wait until the magic date near the end of January. At that time we will know the fourth quarter and the whole year.

But we can get close today if we compare the sum of the first three quarters of 2018 to the sum of the first three quarters of 2017. The numbers in the table below show that real GDP rose by 2.5% in the three quarters of 2018 compared to the fourth quarter of 2017. The 1.9% says the economy grew by 1.9% from the end of 2016 to the third quarter of 2017. The 0.6% shows that growth in the first three quarters of 2018 was higher than the same period in 2017. We can conclude that the economy grew faster in 2018 than it grew in 2017.

The table includes all the key parts of real GDP -- so we can look deeper into what were the strong/weak sources of that growth increase. As you move your finger down the CHG column, look for the biggest positive numbers:
  • The biggest number is the 4.0 for intellectual property rights. After growing at 4% in the first three quarters of 2017, this category grew by 8% in the first three quarters of 2018. 
  • The 3.3% for net exports means the opposite of how it looks. It is telling us that net exports got more negative in 2018 compared to 2017, because exports of goods slowed while our imports of goods increased. This is a subtraction from output!
What other categories were stronger in 2018 than 2017? The 2.8% for national defense spending was one; the 2.2% for business structures was another.

Among the categories that grew slower in 2018 than in 2017 were:
            -3.7% Business Fixed Investment: Equipment
            -3.3% Residential investment
            -1.2% Consumer Durable goods
            -1.5% Exports of Services
            -0.4% Exports of goods

As we think about the final months of 2018 and 2019, it helps to think how the first three quarters of 2018 went. The big winner was business spending on intellectual property. Business also revved up spending on structures but equipment spending slowed dramatically. Consumer spending on durable goods also declined in 2018 and our exports of goods and services geared down. The trade balance was a larger drag on the economy. 

It is very clear that many of the important drivers of economic growth were contributing much less in 2018 compared to 2017. It will be interesting to see how the fourth quarter changes this picture. Will all of 2018 turn out to be better than all of 2017? 

Table. Real GDP Comparisons Based on Three Quarters*

*The number for 2017 is the percentage change from 2016 IV to 2017 III.
*The number for 2018 is the percentage change from 2017 IV to 2018 III.

Net exports are generally very negative in value. The positive value for the changes, therefore mean a worsening of the trade balance, i.e., a larger negative number.

2017 2018  CHG
        Gross domestic product 1.9 2.5 0.6
Personal consumption expenditures 1.7 2.1 0.3
    Goods 2.9 2.6 -0.2
        Durable goods 4.5 3.3 -1.2
        Nondurable goods 2.0 2.3 0.3
    Services 1.2 1.8 0.6
Gross private domestic investment 4.8 5.1 0.3
    Fixed investment 4.1 3.5 -0.7
        Nonresidential 5.0 5.1 0.1
            Structures 2.5 4.7 2.2
            Equipment 7.1 3.3 -3.7
            Intellectual property products 4.0 8.0 4.0
        Residential 1.1 -2.2 -3.3
    Change in private inventories na na na
Net exports of goods and services 1.1 4.4 3.3
    Exports 3.0 2.2 -0.8
        Goods 2.6 2.2 -0.4
        Services 3.8 2.3 -1.5
    Imports 2.5 2.8 0.3
        Goods 2.4 3.0 0.6
        Services 3.0 1.9 -1.0
Government consumption expenditures and gross investment -0.4 1.8 2.3
    Federal 0.3 2.4 2.1
        National defense 0.5 3.4 2.8
        Nondefense -0.1 1.0 1.2
    State and local -0.9 1.5 2.3