January 30, 2014 | By

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.

About

Phil Levy is senior fellow on the global economy at The Chicago Council on Global Affairs. Previously he was associate professor of business administration at the University of Virginia’s Darden School of Business. He was formerly a resident scholar at the American Enterprise Institute and taught at Columbia University’s School of International and Public Affairs. From 2003 to 2006, he served first as senior economist for trade for President Bush’s Council of Economic Advisers and then as a member of Secretary of State Rice’s Policy Planning Staff, covering international economic matters. Before working in government, he was a faculty member of Yale University’s Department of Economics for nine years and spent one of those as academic director of Yale’s Center for the Study of Globalization.

His academic writings have appeared in such outlets as The American Economic ReviewEconomic Journal, and theJournal of International Economics. He is a regular contributor to Foreign Policy magazine’s online Shadow Government section and writes on topics including trade policy, economic relations with China, and the European economic crisis. Dr. Levy has testified before the House Committee on Foreign Affairs, the Joint Economic Committee, the House Committee on Ways and Mean, and the US-China Economic and Security Review Commission. He received his PhD in Economics from Stanford University in 1994 and his AB in Economics from the University of Michigan in Ann Arbor in 1988.

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