Friday, January 28, 2011

Are We There Yet?

No, but today's GDP report indicates we are getting closer.  Total current dollar spending, as measured by final sales of domestic output, grew an annualized rate of 7.3%.  This is fantastic news. We need several more quarters of catch-up growth like this to bring nominal spending back to its trend.  Doing so would go along way in making a more robust recovery. 

Here is a figure showing the updated final sales along with its 1987-1998 trend. (Click on figure to enlarge).)

As I explain here, I pick this period's trend because it is the part of the Greenspan period where there were no wide, unsustainable swings in economic activity.  Moreover, 1998 is when the Greenspan Fed for the first time significantly deviated from past practice by lowering the federal funds rates even though the economy was experiencing robust economic growth.  George Kahn provides Taylor Rule evidence that supports this notion.

Update: Bill Woolsey, who prefers a 1984-2007 trend, also takes notice of the acceleration in final sales.


  1. How long before it's too late to think about 'running' things temporarily hotter in order to catch up?

    For example, if Bernanke runs NGDP at 5% (or whatever) for the next two years, do you call it quits and just stay on the 5% mark and cease trying to make up for lost ground?

  2. David
    Sorry, but I have to say that your Nominal Expenditure definition (Final Sales to Domestic Purchasers) is not "consistent" with the other 2 measures (NGDP and Final Sales of Domestic Product) and it is the reason that leads you to put so much "blame" on MP in 2002-05. Compare your picture with Bill W´s (who prefers FSDP) or calculate the trend path using NGDP (from 84 or 87) and you´ll see.
    Also, (not that it makes much diffrence) but since you think MP was "deviant" in 98 you should estimate the trend up to 97

  3. David
    I put up an "extended comment" in english:

  4. I agree with Marcus Nunes.

    Textbook monetary theory states that the exchange rate is one of the channels for monetary policy. FSDPur excludes it.

    The FSDP was astonishing (since the recovery began it has never exceeded 3.0%). In real terms the increase was 7.1%, the most in 26 years. I think this shows a number of things:

    1) QE2 worked
    2) Expectations matter (Bernanke’s Jackson Hole speech probably did more than the actual implementation)
    3) There are no lags to monetary policy.

    Needless to say an explicit target would help much more than an arbitrary asset purchase figure. But first more people need to be convinced that 1) printing money has real effects in the short run, and that 2) something needs to be done.

  5. It used to be that macroeconomics students were taught,as Friedman said in one of his essays on the Quantity Theory, nothing is less inherently important than nominal magnitudes. This post suggests we have forgotten that. After all, Germany in 1922 had an impressive nominal GDP figure.
    On real figs, things aint looking so hot. U6 at 17% ? Not so good.

  6. ecb,
    Actually I think the whole point of Friedman's Monetary History of the United States (and in fact his entire Noble Prize winning career) is that nominal magnitudes matter a great deal. That's the whole point of Monetarism.

    Thank God he was not an Austrian.

    He was an American.

  7. Marcus,

    Wow, not much I can say in response to your impressive post. I will mention it in a future post. Note, though, that I actually use final sales of domestic product (not final to domestic purchasers) in this post. In my previous post a few weeks ago I showed both series, but here I didn't. I acknowledge the point that monetary policy can work through exchange rates to stabilize spending and thus that it is important to use final sales of domestic product. Is it true, though, that in the past I focused on domestic demand more.

    The real issue is where to set the trend. I still believe the Fed deviated starting in 1998. The output gap indicates as much for that time. Even so, one could argue that eventually the economy adapts to new trends and thus by the time of the collapse in 2008 the 1987-1998 trend was irrelevant.

    Thanks for the thoughtful reply.

  8. ECB,
    Yes, real variables ultimately matter. However, given relatively sticky prices, shocks to nominal variables drive much of the change in real ones. This figure powerfully shows this relationship.

  9. We're going to have to disagree there. As we survey the manifold expansion of output over the centuries, human technological and organizational ingenuity is the driver of real gdp growth,not changes in the money supply. Of course, innovations in financial intermediation and risk sharing and the payments mechanism are examples of this ingenuity but I don't think that's what is what you are talking about....You are talking about statistical money innovations. These may drive transitory fluctuations but you are way overstating your case to say it drives much of the real gdp change. A goodly part of the money supply fluctuations are in any case endogenous.
    You cannot seriously believe that our already semi-lost decade (2000-2010) is monetary driven?

  10. ECB,

    I think everyone here agrees with you for the long-run. It is the short-run where we give credit to nominal shocks. And no, that doesn't rule out the possibility of real shocks in the short run too, but in terms of business cycle activity of the past few decades I see strong evidence for the importance of nominal shocks.

  11. Yes David. In the long run money is of course neutral. But in the long run we are all dead.