Prepping for Friday: What’s trend GDP growth?

July 22nd, 2018 at 8:58 pm

This Friday morning at 8:30, we’ll see the first estimate of GDP for 2018Q2. Various trackers have it coming in at or above 4% (that’s the real, annualized quarterly growth rate). It’s that ballpark correct, as I expect it is—the trackers use much of the same incoming data as BEA—it will be a big political football, but that’s not the purpose of this post. Here, I’d like to think about the best way to pull out the underlying trend of real GDP growth.

While team Trump will be going bananas for any number with a handle of 4 on it (as would, to be fair, even a normal administration), it’s widely agreed upon by long-time GDP watchers that any single quarter should be down-weighted, and even more so if it’s an outlier (i.e., well above or below trend). But the concept of outlier implies the existence of a known trend, and that’s where things get a bit more confusing these days.

The first thing you want to do when hunting the trend is to get away from the noisy, annualized quarterly growth series. Figure 1 shows, for example, how the year-over-year change cuts through the volatile annualized quarterly data (for all of these figures I’ve plugged in 4.5%, as per the Atlanta Fed’s GDPNow, for 2018Q2).

Source: BEA

The end of the yr/yr series, juiced in part by my plug-in, shows a nice acceleration to around 3%, but it also shows rates of 3% achieved pretty recently, around 2014-15. Yet, most non-thumb-on-the-scale analysts estimate trend GDP growth to be closer to 2 than 3. I agree, meaning there is still be too much noise in the yr/yr series to pull out a reliable signal of the underlying trend.

If you didn’t know better, you’d use a simple HP filter to pull out the signal and call it a day, as in the next figure (most such examples apply the filter to log GDP, not to its annual change, as I do here, but the reasons to not use this filter pertain here as well). But as Jim Hamilton recently wrote, this approach risks bringing “all kinds of patterns into the HP-filtered series that have nothing to do with the original data-generating process and are solely an artifact of having applied the filter.”

Source: BEA, my analysis

The HP filter can be especially misleading at the end of series as its construction leads it to hew too close to the actual data. And that’s the part in which we’re often most interested.

Hamilton has his own recommended approach (follow the link above), and sure enough, if you run both the HP and Hamilton filters on log real GDP, the Hamilton trend is well below the actual data at the end of the series (remember, all these figures plug 4.5% in for Q2). The Hamilton filter, to its credit, is a tougher customer and requires more convincing than HP before it accepts a more persistent shift in the series, i.e., a change in the trend. The implied recent growth rate of the Hamilton series, btw, is around 2%, which, as noted, many of us still think of as real GDPs trend.

Source: BEA, my analysis

There is, however, the matter of the stimulus, which is clearly pushing growth above that trend rate as fiscal injections of more than $200 billion a year both this and next year are prone to do. Goldman Sachs researchers report a fiscal boost to real GDP growth of a bit north of 0.5 ppt in both 2018 and 2019.

But that’s Keynes, not Laffer, meaning once the fiscal impulse fades, it’s back down to trend (more precisely, negative fiscal impulse might will take GDP below trend for a few quarters).

So, beyond a wild card I’ll note in a moment, GDP is probably growing at a long-term trend around 2%, though near-term quarters will be above trend. And we should get no more elated by the 4.5% on Friday, if that’s the print, than we should be disappointed by the 2% final estimate for Q1.

The wild card is this: Though we could use more empirical evidence, I’m increasingly moved by reverse hysteresis arguments, where positive demand shocks can boost the economy’s supply side (here’s a nice empirical paper with some evidence from Coibion et al written for CBPP’s Full Employment Project). To the extent, for example, that the tight job market pulls in more labor market sideliners, there’s the potential for faster labor force growth. Also, as Bivens argues: “A ‘high-pressure economy’ that eliminates the remaining demand shortfall in the U.S. economy and leads to low rates of unemployment and rapid wage growth would likely induce faster productivity growth.”

The logic is that firms, in order to maintain profit margins in periods of high labor costs, must find efficiencies they can ignore in slack markets. [What’s that? This can’t be right because any firm not operating at the edge of their PPF will be forced out of businesses by more productive competitors? Yeah…no.]

Especially given relatively tame (core) price and wage inflation, what’s the downside of seeing if he’s right?!

At any rate, if BEA delivers unto us a GDP growth rate for Q2 that starts with a 4, go ahead and applaud. Then sit down and back out the trend.

Note 1: I’ll rerun some of these figures with the actual estimate on Friday, time permitting.

Note 2: I didn’t get into it here, but there are good arguments for gleaning real GDPs trend from sub-measures that leave out volatile components. One popular entry is real final sales to private domestic purchasers, which is C + I – inventories + imports. BEA itself says this series tracks “the more persistent movements in spending by consumers and businesses.”

This last figure plots real GDP and real final sales to domestic purchasers, yr/yr. There is less of an acceleration in final sales toward the end of the series, and I like that it’s smoother than GDP growth. But since 2010, they seem to telling a similar story.

Responding to questions re my wage oped.

July 19th, 2018 at 4:56 pm

I’ve got a piece in the NYT on the cyclical, and more importantly, structural factors, that have long suppressed real wage gains. I’ve gotten many interesting responses, some of which I’ll address here.

Inflation: As I stressed in the piece, the ups and downs in price movements have been instrumental in recent years. A lot of this is energy prices, which crashed in 2015 and have picked up of late. If energy prices pull back, especially as unemployment falls further, real working-class pay should get a boost.

But the concerns I stress in the piece, especially the collision of stronger institutional and corporate anti-worker forces with weaker pro-worker forces, are robust to a short periods of real gains. This raises another good question I got, which I’ll tackle below: what is it you’re looking for here? Surely, a few months of real gains don’t mean workers are in the clear, but how will we know if these punishing dynamics have turned?

Someone suggested that I shouldn’t use the CPI deflator in the piece. One of the benefits of doing so is that’s what BLS uses, so my findings link up with what’s being reported. The CPI is also the most reliable way to track consumer prices, except for it’s not chained (look up chain-weighting if you’re interested). Aside from that, I agree with the Mishel/Bivens discussion here on why the CPI is preferable to the PCE for deflating wages.

However, there is a chain-weighted CPI since 2000 (CPI-C), and it runs about 0.3% cooler, year/year, then the unchained version, meaning that’s how much faster real values grow if deflated by the CPI-C, on average. That said, using the unchained CPI shows the working-class real hourly wage up 0.5% since 2016 while using CPI-C returns 0.8%. So, pretty much the same story.

Policies: The most common response I got was what should we do to give workers more bargaining power? I’ve written books about this, where “this” is government policies to ensure a more equitable distribution of growth and ample protections against market failures (where “market failures” doesn’t just mean recessions or negative externalities; also, failures of the equitable distribution of resources and opportunities). As per the diagnosis in the Times piece, a lot of this is about strengthening worker bargaining power and protections. The topline themes are:

–maintain chock full employment (meaning there’s a role for the Fed too);
–direct job creation;
–update, maintain, and enforce labor standards (minimum wages; overtime);
–support collective bargaining; oppose “right-to-work (for less)” laws;
–de-rig the system as per Dean Baker’s insights re upward redistribution through trade deals, patents, IP policies, privileging the finance sector;
–collect ample revenues; no trickle-down tax cuts; robust safety nets;
–universal health coverage;

Some of this may invoke this debate among Democrats about the electoral wisdom of “moving to the left.” I don’t see the problem (neither does EJ Dionne, in this highly resonant piece). It seems obvious to me that something big has got to give is we’re to get back to Factville, representative government, and the reestablishment of durable linkages between overall growth and broadly shared prosperity.

As far as politics, I’ll go with EJ: “Radical tax cuts from the right and measured austerity from the center represent a dreary choice for discontented voters and offer little hope for solving the problems that ignite their anger.”

What does success look like? My piece suggests that if paychecks mete out some cyclical gains before the next downturn, that won’t be enough to reset the structural power imbalances I emphasize. So, some folks wanted to know what would success in this space look like. I’d like to see median and low-wages grow at around the rate of productivity throughout the cycle. For some workers in low value-added sectors and jobs, that criterion shifts to “after-tax and transfer” wages/incomes, especially if they’re parents. But closing the gap you see below strikes me as the right goal.

Source: EPI

What about technological change as a factor driving wage stagnation? Does my focus on power dynamics mean I don’t think the SBTC (skill-biased technical change) is that important? SBTC is the idea that wage inequality is a function of a shortfall in the labor supply of highly skilled, technically adept workers (given employers’ demands) relative to an oversupply of less-skilled workers. In a way, it’s a more benign explanation, though even if it’s right, certainly power dynamics dictate who gets access to the high-demand skills.

But SBTC certainly doesn’t link up with the cyclical part of my story. If the job market is so damned tight and labor shortages are so damn binding, then employers should be bidding wages up more than we’re seeing.

As far as structural dynamics, skill demands are in the mix, for sure, but as best I can tell, they’re a relative steady force over the past few decades, whereas the anti-worker institutional forces seem to me to accelerating. Increased firm concentration, the increased attacks on unions, the growing corporate tilt of the courts, the rise of arms-length employment relationships and wage-suppression measures like anti-poaching rules—my guess is that these are increasingly determinant of economic outcomes relative to SBTC.

Team Trump’s phony poverty argument, GDP growth v. chaos, and a little e.g. of where an FTT would come in handy.

July 17th, 2018 at 3:12 pm

First, Trump’s Council of Economic Adviser abuses data and logic to conclude that work requirements would help poor people. Over at WaPo.

Next, I will not stray from my lane and comment on what everybody’s thinking about today: the summit from Hel…sinki. I will share this Steven Colbert clip, to which I’ve nothing to add.

I do, however, find it interesting that amidst all this madness–which feels too much like an existential threat to American democracy from within–the US macroeconomy is, if anything, stronger. Obviously, I’m all about the distribution of GDP growth, which remains a serious problem. Also, quarterly GDP numbers are jumpy and it’s a far more limited measure than we generally admit. But the latest GDPnow forecast for Q2 (data out late next week) is 4.5%, which is about 2.5% above trend.

Part of this, maybe a bit north of half-a-point, is fiscal stimulus; also, strong financial conditions and high corp profits and the strong labor market–more jobs than wages, but aggregate employment * earnings is fueling strong consumer spending.

Sources: BLS, BEA

But neither trade war, a president leaning into treasonous rhetoric, nor a dysfunctional Congressional majority that does nothing to restrict him seem to dent the macroeconomy, at least thus far.

That’s not so hard to believe. I’ve got quibbles with some of their actions, but the Fed is still a strong, and most importantly, politically independent institution working to maximize employment at stable prices. And the simple, virtuous cycle that drives expansions–more demand, more jobs/incomes, more demand–is strong and durable. Our credit and financial markets are deep and liquid. The trade war has hardly dented equally deep global supply chains (at this stage, Trump has placed tariffs on less than 5% of our imports). Even if it gears up, I don’t expect large, negative macro effects from it (though certain industries/products will be hurt; e.g., soybean exporters currently hit by Chinese counter-tariffs).

But let’s keep it real as to the limits of GDP. Though it does a good job of measuring a narrow concept, we elevate it to a much greater level of significance than it deserves. It not only fails to reflect environmental degradation, it scores such actions as growth-positive. It says nothing about the distribution of growth. OTE’ers know I’ve been hammering on the weak real-wage-growth story and we just learned that the real annual earnings of full-time, middle-wage workers fell by half a percent in the second quarter, and this was their third quarter in a row of losing ground. Meanwhile, as noted above profits are crushing it.

Source: BLS

And, of course, GDP says nothing about the loss of representative democracy.

There are those who believe that if GDP, profits, and the stock market are all up, then there’s nothing to worry about. I suspect if you’re reading this, you’re more moved by a fair distribution of growth, a sustainable environment, a representative voice in politics and in the workplace, racial and gender justice, economic mobility such that people can achieve their potential whatever their race or zipcode, and more along those lines.

Don’t get me wrong. I don’t take GDP growth for granted and worry a lot about the next recession. But even a string of strong quarters, if that’s what we’re looking at, is nowhere near enough to assuage our current discontent.

Finally, this article from the WSJ about how high-speed traders are front-running trades on future ag prices by getting the data two seconds before everybody else. In high-freq trading land, two seconds is analogous to two months. Anyway, the Ag Dept is going to try to make sure everyone gets the data at the same time, but I’m with the guy in the piece who said:

“I struggle to see how releasing crop and livestock reports via the USDA’s website will address the fact that some participants will be able to capture, analyze and respond to that data more quickly than others,” Rob Creamer, president and chief executive of Geneva Trading, a high-tech trading firm in Chicago, said in an email.

There’s a simpler, surefire way to fix this problem: a small, one or two basis point financial transaction tax. Not only would an FTT raise needed revenues, it would dampen noise trading that has far more to do with nanosecond price arbitrage than allocative efficiency. Moreover, given the long-term decline in the costs of financial transactions, such a small tax as I’m suggesting would be unlikely to dampen market liquidity versus the high-frequency stuff.

No, the R’s in control won’t go for this or any other revenue raiser. But I and everyone else who likes this idea needs to start elevating it such that when and if rationality returns, an FTT is prominently teed up.

Lynx, trade politics, a super swingin’ slice of Kelly Roll, and a bit of pop psychology re JOMO

July 12th, 2018 at 9:11 am

Trade policy has been really interesting of late. I get into the economics of what I think is going on here and here. The first piece makes the argument that Trump is fruitlessly and fecklessly trying unscramble the globalization omelet. The second takes on–with help from a great, new Susan Houseman paper–the incorrect but pervasive notion that the increased pace of labor-saving technology is responsible for manufacturing job loss.

I don’t get into the politics of trade in these pieces because I can’t clearly figure it out. Yesterday someone asked me, “where are the Democrats on trade policy right now” and I hemmed and sputtered until he walked away. For years, a large flank of D’s have opposed trade deals they judged to be unfair to workers and consumers, warned about China’s mercantilism, and recognized the downsides of imbalanced trade. Now, a reckless, chaotic president is sharing some of that airspace, though, at least as I argue the case, doing so in ways that are unlikely to help.

So, tricky politics, but perhaps there’s an opening here. Think of Trump as a dry run. Voters wanted someone to do something about globalization’s downsides, and they threw the dice with him. If, as I strongly suspect will be the case, he and his policy team’s incompetence fail to deliver the goods, the demand for better policy will still be there, perhaps even stronger than before. Thus, the smart play for the opposition party is to be ready to hit the ground running with an agenda that might actually…you know…work!

I have numerous favorite jazz pianists: Red Garland, Herbie Hancock, and perhaps the most hard swinging of them all: Wynton Kelly. I’ll be shocked and disheartened if this little jam of his–Kelly Roll–doesn’t get you poppin’ your fingers and tappin’ your toes. Every measure here is high-octane, but check out his trickerations at 1:19. If I could do that, I’d never open another damn spreadsheet.

There’s and old jazz legend that during a recording session, Miles Davis leaned over to drummer Jimmy Cobb and said, “I wish I could swing like Wynton.” Cobb supposedly responded, “I wish you could too.” Chilly.

Allow to swerve wildly out of my lane for a moment and reflect on FOMO and JOMO, as I think they’re fundamentally important. That’s “fear of missing out” and “joy of missing out.” Many of us experience the former, which keeps us tethered to our smart phones, mindlessly scrolling through mind-numbing input at great cost to our connection to family, nature, attention span, and true enjoyment of the moment.

Here’s yet another article about the importance of detaching from this destructive cycle, but I often find that articles like this, while spot on re prescriptions, miss a fundamental part of the diagnosis.

Again, apologies for playing psychologist, and someone who knows what they’re talking about should feel free to correct me if I’m wrong, but I’m convinced that what’s at the heart of FOMO, and the reason smart phones, social media, email, and all the rest of it are so deeply addictive is that we’re almost all of us insecure people, many of us profoundly so.

The builders of the technology recognize and tap this weakness by dolling out rewards that signal to us that we’re more interesting, important, and necessary than we fear we are. In this model, each “like,” re-tweet, email, text, etc. is self-affirming, a tiny, little message that we’re more worthy than we thought.

And, of course, the obverse is true: every lack of e-confirmation confirms what we already deeply suspected: no one’s interested in our lame-ass existence.

If I’m right, promoting the vital importance of JOMO without getting at this root problem will fall on deaf ears. We’ll understand the need to detach in our conscious mind, but our much more powerful, cloying, self-effacing, “please love me!” (i.e., retweet me) brain will brush any JOMO insights aside and we’ll be scrolling until the battery runs out or we’re brain-dead, whichever happens first.

In other words, detaching from self-worth and your alleged importance and value in the eyes of others is an absolutely necessary precondition for detaching from technology. Without the former, we’ll never accomplish the latter.

OK, back to inflation, interest rates, productivity….and my twitter feed.

Why I’m not paying too much attention to the flattening yield curve.

July 9th, 2018 at 3:17 pm

As Nick Timiraos ably describes, there’s a debate afoot about how seriously to take the flattening and possible future inversion of the yield curve. I got into this a bit last week, pointing out that the signal from the yield curve is a lot more ambiguous than usual (my conclusion was that we should worry a lot more about how we’re going to offset the next recession versus when it’s coming, which is not reliably knowable).

One reason for this ambiguity is the very low term premium on long-term bond yields (see figure). Longer-term interest rates, like the yield on the 10-year Treasury, can be broken up into the expectation of the average of future short-term rates and the term premium, or the extra yield investors require to lock up their money for the term of the loan. Since it’s thought to be the first part — expected rates — that correlates with future downturns, it makes sense to net out the term premium from the model. As the next figure shows, that significantly lowers the curve recession probability (see these Fed papers for details). As economist David Mericle recently put it, low term premia imply that “an inversion…no longer signals that current interest rates are nearly as far above expected average future short rates as in the past.”

Source: Mericle, GS

 

Sources: Fed, NBER

But for this quick post, I want to get a bit more into what an inversion might mean for Fed policy. Would recessionary signals from an inversion lead them to pause in their rate hike campaign?

I doubt it, and agree with Jan Hatzius: “…yield curve inversion does not cause recession, but is merely indicative of the types of conditions (i.e. overheating) that are often followed by recession. This sounds like a technical distinction but implies, crucially, that the Fed cannot lower the risk of recession simply by refusing to deliver hikes that would invert the curve. This would worsen the overheating and could ultimately lead to an even bigger inversion and an even higher risk of recession.”

We can and should have good debates about the extent of overheating in the current economy, about which I’m pretty dovish. Yes, inflation’s up a bit, but a) it should be at this point in the expansion, b) core PCE just hit 2%–the Fed’s target—after being below target for years, c) most importantly, inflation expectations remain as well-anchored as ever.

So, based on extraneous factors flattening the curve and the low likelihood that an inversion may not much alter the Fed’s normalization plans, I’d pretty heavily discount the yield curve. Of course, that doesn’t mean a recession isn’t out there somewhere—it is. We still don’t know where, but unless it’s unusually mild, we can be pretty confident that neither monetary nor especially fiscal policy will be poised to do enough to offset it.