GDP

Week three homework – please answer the following questions and submit your answers in the form of a word document in the week three homework dropbox.

1. Using the information and contents of the articles, explain in detail the current state of the U.S. economy. Include the principles of GDP, economic growth, the business cycle, real GDP, actual GDP vs. potential GDP, and inflation and unemployment.

2. From the information contained in the articles, answer the following questions: what is the current state of the labor market in the United States? How has the labor market changed in the recent past? What are the prospects for a good paying job in the United States? How has the unemployment rate changed over the past several quarters and is the unemployment rate an accurate measure of the labor market picture.

Economists React: Jobs Data a Mixed Bag, But Tapering Still Likely

BySarah Portlock WSJ 9/6/13

Economists weigh in on today’s jobs report that showed a smaller-than-expected job growth but a stronger unemployment rate. Some suggested the Federal Reserve is still on track to consider paring back its large-scale bond purchases as soon as its next policy meeting, Sept. 17-18. Other analysts said that is no longer certain.

The headlines seem pretty good. Unemployment fell a tick to 7.3%. And jobs growth continued, with payrolls expanding by 169,000 in August, which is just shy of the 175,000 new jobs that analysts were expecting. But beneath the headline: blech! The most important news was the revisions to what we had previously thought were a healthy and perhaps self-sustaining recovery. Instead, jobs growth in July was revised from 162,000, to a weak 104,000, and June was also revised downward. Taken together, this month’s revisions mean we’ve created 74,000 fewer jobs than previously believed. And the previous jobs report subtracted another 26,000 jobs through revisions. Moreover, for reasons that remain a mystery, revisions have tended to be pro-cyclical, meaning that the healthy recovery we thought we were having might have been expected to yield further upward revisions. All this means that analysts are hastily revising their views. –Justin Wolfers, Brookings senior fellow in economic studies

Participation rates fell for both adult men and women and even more so for teens. This is not good news for the employment/population ratio. Declining participation rate bad for financing entitlements long-term and potential economic growth trend. –John Silva, Wells Fargo. The participation rate dropped to its lowest since August 1978.

August’s employment report is a mixed bag that can be used to support an immediate tapering of the Fed’s monthly asset purchases or delaying that move until later this year. Our best guess is that the cumulative evidence of improvement over the past year will convince a majority of officials that the tapering should begin at the next FOMC meeting in another couple of weeks’ time, but we’re not going to pretend this is a certainty. –Paul Ashworth, Capital Economics

What we find disturbing in this report was another round of downward revisions to prior months. That is the second month in a row, and the level of revisions was sizeable at -74,000 most of which occurred in July. The direction of those revisions are even more relevant. Labor markets that are gaining momentum are rarely peppered with downward revisions, the opposite typically prevails. That makes us a bit nervous. Another source of weakness was in the household survey. Jobs there fell 115,000 (this measure is much more volatile) and while the unemployment rate fell to 7.3% it did so on weakness. The participation rate fell back to cycle lows of 63.2%. –Eric Green, TD Securities

The August employment report came in below expectations and suggested that the tension this year between subdued growth and robust hiring, sometimes referred to as the productivity conundrum, is being resolved in favor of slower hiring rather than faster growth. … The report is in line with our expectation that the Fed will postpone tapering of QE at the meeting in two weeks. While the bias to taper will remain intact, as stressed by FOMC voter and Chicago Fed President

Charlie Evans this morning, the Committee probably needs to see more evidence that the economy is on a strengthening path before reducing the pace of asset purchases. – Julia Coronado, BNP Paribas

The taper camp was thrown a curve ball this morning when the payroll numbers came in below expectation and after the downward revision to the prior two months the case for tightening has become less clear cut. This doesn’t mean the street will do an about-face. Instead, I expect there will be a few defections but the consensus will still call for the taper to begin. The logic will be that the jobless rate is declining. We hold on to our view that the backup in rates is counter, not pro-, cyclical. … We still think tapering is a mistake. – Steven Ricchiuto, Mizuho Securities

First-Quarter GDP Growth Rate Revised Down to 1.8%

U.S. Says Economy's Pace of Gains Slowed Amid Revision in Consumer Spending, Business Investment

By SARAH PORTLOCK And JONATHAN HOUSE – WSJ 6/26/13

WASHINGTON—The U.S. economy expanded at a slower pace than previously estimated in the first quarter as consumer spending and business investment were revised sharply downward, indicating a weaker trajectory for the economy even before growth downshifted in recent months.

The nation's gross domestic product, the broadest measure of all goods and services produced in the economy, grew at a 1.8% annual rate from January through March, the Commerce Department said Wednesday. That was less than the earlier estimate of a 2.4% growth rate.

The revision was due largely to slower growth in consumption, which eased to a 2.6% gain from the earlier estimate of 3.4%. Consumer spending, which accounts for two-thirds of economic output, was likely hit by a rise in payroll taxes at the start of the year and relatively stagnant incomes, two forces that have pushed the saving rate lower.

Spending on legal services, personal care and health care all were weaker than previously estimated, the Commerce Department said.

The latest figures raised questions about whether growth will be strong enough later in the year for the Federal Reserve to start dialing back its $85-billion-a-month bond buying program. That prospect helped push stocks higher Wednesday and pushed the yield on the 10-year Treasury note lower, easing borrowing costs.

Barclays economist Peter Newland said the revised first-quarter GDP estimate will make it difficult for the economy to grow by 2.3% to 2.6% this year, as the Fed forecast last week. "It paints a picture of an economy with clearly less growth momentum at the start of the year than previously suggested," he said.

In addition, growth in the second quarter, which ends Sunday, could have been restrained by across-the-board federal spending cuts that took hold.

Those cuts, which began in March, are expected to weigh on government spending at least through the end of the fiscal year, Sept. 30. They could undermine growth by trimming direct federal expenditures, hitting firms that rely on government contracts and hurting workers whose salaries are tied to the government.

Macroeconomic Advisers, a research firm, expects the economy to expand at a 1.4% annual rate for the second quarter.

Some Fed officials had grown more optimistic about the economy partly because of the resilience of consumer spending in recent months, offering hope for even stronger growth later in the year once the economy adjusts to the government spending cuts.

Fed Chairman Ben Bernanke last week said the "main drag" to growth this year is federal fiscal policy. "Our judgment is that, given that very heavy headwind, the fact that the economy is still moving ahead at at least a moderate pace is indicative that the underlying factors are improving," he said. "Obviously, we haven't seen the full effect yet of the fiscal-policy changes. We'll want to see how that evolves as we get through that fiscal impact. But we're hopeful."

The latest figures raise questions about how much consumers—buoyed by strengthening housing and jobs markets—will be able to prop up growth for the second quarter and offset cuts from the government sector.

"The lower consumption estimate provides some indication that the impact from fiscal austerity may have been more than previously thought, and that the economy started the year on weaker footing than previous estimated," said Millan Mulraine, director of U.S. research at TD Securities. "Some of this weakness should persist" in the current quarter, he said.

Some analysts discounted the importance of the latest GDP revision. Pierpont Securities economist Stephen Stanley said the bulk of the downward revision came from services expenditures categories that are hard to measure and "are not reflective of sharp weakness in cyclically-sensitive elements of consumer spending."

The economy has grown for 15 consecutive quarters, but the pace of those gains—about a 2% rate—is among the weakest for recoveries since World War II. In the fourth quarter of 2012, the economy expanded at just a 0.4% pace.

The latest figures showed a weaker path for the economy in key areas beyond the consumer sector.

Business investment was far slower than previously estimated, with a final reading of only 0.4% growth, compared with a 2.2% gain in the earlier report. Companies decreased spending on structures—particularly power and communication infrastructure—and equipment and software.

Exports were weaker than first estimated, though a decline in imports, which subtracts from GDP, helped neutralize the impact on overall growth.

Government spending was relatively unchanged from earlier estimates but was still a drag on growth. Federal spending, which doesn't include transfer payments such as Social Security, declined at a 8.7% annual pace during the first quarter, matching the earlier reading. Spending at the state and local level fell at a 2.1% pace.

Corporate profits shrank less than previously thought in the first quarter. Income after taxes and not adjusted for inventories and capital consumption decreased 1.4% from the fourth quarter of 2012, but was up 4.7% from a year earlier. The after-tax figures are similar to what companies would report in quarterly accounting.

The housing market remained a bright spot. Residential investment, which includes home building and improvements, advanced at a stronger pace—14%—than previously thought. The sector has contributed to overall growth for eight straight quarters.