Carpe Diem

Year-to-Year Real GDP Growth Was Actually 2.5%!

WASHINGTON — The U.S. economy braked sharply last autumn, pulling growth for all of 2007 to its lowest speed in five years as the housing slump took a heavy toll.

Gross domestic product rose at a seasonally adjusted 0.6% annual rate October through December, the Commerce Department said Wednesday in the first estimate of fourth-quarter GDP. The 0.6% pace was much slower than the third-quarter’s racing 4.9% rate.

Comment: Real GDP growth in the second and third quarters of 2007 was higher than average, at 3.8% and 4.9%, respectively, and then dropped to .60% in the fourth quarter. But why does the media (see WSJ article above) focus so much on these quarter-to-quarter growth in real output? Shouldn’t we also be concerned about year-to-year growth as well?
That is, why do we focus so much on 4th quarter 2007 real GDP in comparison to 3rd quarter GDP (0.60%)? Shouldn’t we also pay attention to the growth rate in real GDP from a given quarter to the same quarter in the previous year? After all, coming off a 5% quarter like the third quarter, it’s going to be difficult to always sustain that kind of above-average growth in the next quarter, and just returning to normal growth (on an annual basis) in the following quarter might make the economy look weaker than it really is.

Comparing real GDP in the 4th quarter of 2007 to the 4th quarter of 2006 (and doing the same for all previous quarters), real output grew at 2.5% in the 4th quarter of 2007 (see chart above), much higher than the .60% growth rate calculated from the previous quarter. Of course, the year-to-year measurement also brings second and third quarter growth down sharply to only 1.9% (vs. 3.8%), and 2.8% (vs. 4.9%). Quarter-to-quarter growth rates are always going to be more volatile than the smoothed annual rates from the same quarter in the previous year.

Buried in today’s BEA report, we find this: “During 2007 (that is, measured from the fourth quarter of 2006 to the fourth quarter of 2007), real GDP increased 2.5%. Real GDP increased 2.6% during 2006.”

Isn’t this another possible indication that the economy is NOT in a recession? Notice that the graph in 2007 looks nothing like the graph in 2001, during the last recession (shaded area).
Carpe Diem

Another Downside of Ethanol: Haitians Eating Dirt

Making mud cookies in Port-au-Prince, Haiti

PORT-AU-PRINCE, Haiti (AP) — It was lunchtime in one of Haiti’s worst slums, and Charlene Dumas was eating mud. With food prices rising, Haiti’s poorest can’t afford even a daily plate of rice, and some take desperate measures to fill their bellies. Charlene, 16 with a 1-month-old son, has come to rely on a traditional Haitian remedy for hunger pangs: cookies made of dried yellow dirt from the country’s central plateau.

Food prices around the world have spiked because of higher oil prices, needed for fertilizer, irrigation and transportation. Prices for basic ingredients such as corn and wheat are also up sharply, and the increasing global demand for biofuels is pressuring food markets as well. The problem is particularly dire in the Caribbean, where island nations depend on imports and food prices are up 40 percent in places.

Response from the ethanol lobby? “Let them eat dirt.”

Carpe Diem

Stimulus Package Nitwitery

There are three ways government can get the money for a stimulus package. It can tax, borrow or inflate the currency by printing money. If government taxes to hand out money, one person is stimulated at the expense of another who pays the tax, who is unstimulated and has less money to spend. If government borrows the money, it’s the same story. This time the unstimulated person is the lender who has less money to spend. If government prints money, creditors, and then everyone else, are unstimulated.

~Economist Walter Williams on tax stimulus math:

(+$1 of Stimulus) + (-$1 of Unstimulus) = O Stimulus

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Gov’t. Expansions in MI = 24; Gov’t. Limitations = 4

“Hillary, I’d like to expand government by at least this much.”
Michigan Governor Jennifer Granholm gave her “State of the State” address tonight, and the Mackinac Center for Public Policy did the math:

Proposed Expansions of State Government: 24

Proposed Limitations of State Government: 4

Gov. Jennifer Granholm tonight surpassed the previous record for government expansions proposed in a State of the State address, according to the Mackinac Center’s annual tally of proposals by Michigan governors to expand or limit the scope of government.

“This year’s State of the State address was a series of contradictory signals,” said Michael D. LaFaive, director of the Mackinac Center’s Morey Fiscal Policy Initiative. “The governor offered a litany of expensive proposals in the same speech in which she discussed our state’s economic distress. Michigan would probably benefit more if the proposals had been reversed, with 24 limitations and just four expansions.”

Carpe Diem

Laffer Curve, Part I: Understanding the Theory


The Laffer Curve charts a relationship between tax rates and tax revenue. While the theory behind the Laffer Curve is widely accepted, the concept has become very controversial because politicians on both sides of the debate exaggerate. This video, featuring Cato Institute Senior Fellow Dan Mitchell, shows the middle ground between those who claim “all tax cuts pay for themselves” and those who claim tax policy has no impact on economic performance.

This is Part I of a three-part video series, and focuses on the theory of the Laffer Curve. Part II reviews historical evidence of Laffer-Curve responses. Part III discusses how the revenue-estimating process in Washington can be improved.

Carpe Diem

Durable Goods Strength Suggests No Recession

From yesterday’s WSJ article by Brian Wesbury:

A year ago, most economic data looked much worse than they do today. New orders for durable goods fell 3.9% at an annual rate during the six months ending in November 2006 (see graph above, red circle). Real GDP grew just 0.6% in the first quarter of 2007 and retail sales fell in January and again in April. But the economy came back and roared in the middle of the year — real GDP expanded 4.4% at an annual rate between April and September.

From today’s Commerce Department report:

New orders for manufactured durable goods in December increased $11.2 billion or 5.2% to $226.6 billion (Note: Expected consensus was only a 1.6% gain). This was the second consecutive monthly increase and followed 0.5% November increase. Excluding transportation, new orders increased 2.6%. Excluding defense, new orders increased 2.9%. Transportation equipment, up three consecutive months, had the largest increase, $7.3 billion or 11.3% to $71.4 billion. This was due to defense aircraft and parts, which increased $3.5 billion.

Bottom Line: Durable goods orders signal a much stronger economy today than a year ago, as Brian Wesbury suggests. Further, the continued gains in durable goods orders indicate that the U.S. economy is nowhere near a recession, see the graph above (data available here) and notice the steep decline in durable goods orders before, during and after the last recession in 2001.