Friday, July 25, 2014
Economics, Pethokoukis, U.S. Economy

An encouraging sign for US tech innovation

"How fast are semiconductor prices falling?"

"How fast are semiconductor prices falling?"

It would be really bad for the US economy and workers if the pace of American innovation sort of petered out. Just search “great stagnation” to find out why (if it’s not intuitive). Less tech innovation would be a particularly worrisome. From “How fast are semiconductor prices falling?” by researchers David  Byrne, Stephen Oliner (of AEI), and Daniel Sichel:

A stalling out of innovation in this sector likely would have broader implications for the economy, as semiconductors are an important general-purpose technology lying behind machine learning, robotics, big data, massive connectivity, and many other ongoing advances. Indeed, adverse developments in the semiconductor sector ultimately would damp the growth potential of the overall economy. … [But] if technological progress and attendant price  declines were to continue at a rapid pace, powerful incentives would be in place for continued  development and diffusion of new applications of this general-purpose technology.

Anyway, whether or not this is happening is difficult to determine. One way: Look at whether the price of tech stuff, like computer chips, is declining, adjusted for quality. According to government data, chip prices haven’t fallen much in recent years — just 9% from 2008 through 2012 — after rapid declines from the mid-1980s onward, especially during the late 1990s and early 2000s.

That smells like innovation stagnation. Yet there was also continuing improvement in chip performance. How to explain the disconnect? Well, maybe the government is calculating the numbers wrong. Bryne, Oliner, and Sichel point out that right when price declines slowed, Intel changed how it priced its chip and introduced new models:

Prior to the mid-2000s, Intel generally introduced new chips at the technological cutting edge and lowered the list  prices of existing chips to remain competitive on a price-performance basis. However, by 2006, Intel had shifted to a new paradigm in which it largely kept the list prices of existing chips unchanged and began introducing new chips both at the frontier and at lower performance levels.

So Intel changed how it did business, but government price trackers didn’t change their methodology in response. If they had, by better gauging quality changes, the official stats would look quite different:

Our preferred hedonic index of [microprocessor unit] prices tracks the PPI closely through 2008. However, from  2008 to 2012, our preferred index fell at an average annual rate of 39 percent, while the PPI  declined at only a 9 percent rate. Given that MPUs represent about half of U.S. shipments of  semiconductors, this difference has important implications for gauging the rate of innovation in the semiconductor sector.

None of this means Washington should forget about innovation and its key role in economic policy. Innovation is a critical lens through which proposed tax, regulation, and spending should be viewed. But this new paper does provided an important data point suggesting the era of US economic growth doesn’t need to end anytime soon.

Follow James Pethokoukis on Twitter at @JimPethokoukisand AEIdeas at @AEIdeas.

Economics, Pethokoukis, U.S. Economy

‘Economic patriotism’? How about if Washington stops undercutting US multinationals?

Tax Foundation

Tax Foundation

Some (at least I think it’s “some” rather than “all”) left-wing economists would like to dramatically raise income tax rates. But, you might ask, wouldn’t doing so merely push top incomes into clever tax shelters, like in the 1970s — the end result being a more economically inefficient tax code that raises little extra revenue?

Maybe not, since these economists would also crack down on tax loopholes, to create a tax-hike “straitjacket” of higher rates and fewer tax breaks for wealthier Americans (and small business). No escape for you, the 1%!

Now one can see this reform principle at work in the Obama approach to corporate taxation. From the WSJ:

In a letter to Congress on Tuesday, Mr. Lew called on lawmakers to stop U.S. corporations from merging with foreign corporations and locating the parent company abroad to reduce their taxes.

So rather than create a better, pro-growth US tax environment, Team Obama wants to trap US companies in an uncompetitive domestic situation. Team Obama calls that “economic patriotism.” Michael Graetz, a professor at Columbia Law School, in the WSJ:

To ask, “How do we stop American companies from leaving for more favorable tax jurisdictions?” is asking the wrong question. The right question is “How do we make the United States a more favorable location for investments, jobs, headquarters, and research and development activities?” That will require genuine tax reform.

Ireland, Canada and the U.K. now have emerged as favored places to locate corporate headquarters.  …  They have all recently reformed their business income taxes to lower rates. At 35%, we now have the highest statutory corporate rate in the Organization for Economic Cooperation and Development, which has 34 developed countries as members. And, unlike the U.S., the vast majority of OECD countries do not impose taxes when their companies reinvest their foreign earnings at home. When U.K. or Irish treasury officials talk about their low-rate business-tax systems, they don’t speak about patriotism; they talk about being “open for business.”

The U.S. is the only OECD country that doesn’t have a national tax on consumption. Relying, as we do, so heavily on individual and corporate income taxes to pay for federal expenditures hobbles us in today’s global economy. Political leaders from both parties should demonstrate their own “economic patriotism.” They need to stop just talking about tax reform. The time has come for them to sit down together and enact a tax system that is fair, simple for the vast majority of Americans, and much more conducive to economic growth.

By the way, there is evidence that the US probably has highest effective corporate tax rate as well the highest statutory rate.

Follow James Pethokoukis on Twitter at @JimPethokoukisand AEIdeas at @AEIdeas.

Pethokoukis

Chris Christie talks issues!

Image Credit: Bob Jagendorf (Flickr) (CC)

Image Credit: Bob Jagendorf (Flickr) (CC)

Chris Christie chatted today with CNBC’s John Harwood. Here is what Christie said about some key issues, at least things that stood out to me:

Common Core curriculum

CHRISTIE: We have now gone from 10th to 20th in reading, amongst the industrial said nations. If we can continue that trend and still be the smartest most competitive, most cutting edge economy in the world, then you’re wrong.

JOHN HARWOOD: That’s why you support Common Core.

CHRIS CHRISTIE: What I support is to try to change something that’s much more important than Common Core. The most important factor besides a family to successful education is the teacher in front of the classroom. More than anything else is what is the training and experience and effectiveness of that person standing in front of the classroom.

We have an educational system in this country now that puts the come for the of adults before the children. We don’t want to disturb anyone, we don’t want to say anything bad. It’s crazy. The fact is, there are ineffective teachers all across the country, protected by the tenure system that is the essence of anti-competitiveness. We’re for competition everywhere else in the world, but we are not for competition in the K to 12 classrooms in America. And we expect somehow that’s going to produce a good result. It is not.

So from my perspective, before we get to what’s the curriculum in the classroom and all those other issues, you need to first get to having a competitive educational system that rewards good teachers. You should have merit pay across the country and they should get paid more if they are good. And we should haven’t a system that allows bad teachers to be guaranteed a job for life.

Crony capitalism and the Export-Import Bank

JOHN HARWOOD: One of the things that we started to hear a lot in your party, especially from the populist party, is critiques of crony capitalism, the system; like some on the left say is rigged, and people have inside dealings with Washington. And what’s come to stand as the emblem of that, there was an issue in Virginia, the question of the export, import bank, which Eric Cantor supported, and the populist wing and the Republican party said that is crony capitalism. It’s helping Boeing other big companies make deals. They can make the deals themselves. Do you agree with them?

CHRIS CHRISTIE: I think those issues are much more complicated than a lot of people want to take me out to be. The fact is that the government, I think, does have a role in trying to make our country as competitive as we can be, with the folks around the world. Now –

JOHN HARWOOD: Many have programs like that across the country.

CHRIS CHRISTIE: Of course. We have to decide how we want it to be and what basis we want it to be. I don’t disagree with folks who say there are times when that goes over board and that’s — that’s where the congress is supposed to be vigilant about. And if they believe that’s the case, then they need to step in and develop something about it. And if the people don’t like what the congress is doing, they kick people out.

JOHN HARWOOD: We do need to have an export import bank?

CHRIS CHRISTIE: No. What I said was, I think we need to have those time of programs that are present in the congress believe it’s more competitive. We need to have more free trade agreements around the world. I think you need to be encourageing more trade around the world. When America trades with other countries in a free way, America usually does much beater, because of the ingenuity, because of technology we have, because of the entrepreneurial spirit we have in this country, I think we do better.

JOHN HARWOOD: You’re –

CHRIS CHRISTIE: I’m the governor of New Jersey. I don’t spend a lot of time focusing on the export import. I’m not going to pretend to have opinions about things that will be ill-informed and just go, I think I want to be with those folks. What do you think. I’m going to be with them.

JOHN HARWOOD: I don’t think you’re ill-informed.

CHRIS CHRISTIE: You can’t imagine how ill-informed I am.

Tesla Motors

JOHN HARWOOD: Well, let me ask you about a New Jersey-specific issue. I was reading this morning an article in “National Review,” which said you were an alleged free marketeer; but what you did on Tesla and not having your motor vehicle commission change a rule to prevent them from selling directly to consumers showed the power of special interests in New Jersey, auto dealers, that you are not a free –

CHRIS CHRISTIE: It’s simply crap. Here’s what it shows. The legislature passed a law and previous governor signed the law requiring in New Jersey that if you were going to sell automobiles, you must do it through a dealership. Now, Tesla comes in with their new model to sell direct, and I give Tesla a year to sell direct. Operating completely outside the law. And I just said listen, you need to get together with the legislature. I’m not going to stem in and enforce this law vigorously right now, because I will give you time to work with the legislature. I would like them to be able to sell direct. They didn’t do anything. After a while, I take an oath to enforce the law, not just the ones I like, but all of them –

JOHN HARWOOD: But your motor vehicle commission did change the regulation.

CHRIS CHRISTIE: No. We enforced a regulation that already existed based upon a statute. The fact is we looked the other way for a year, to allow Tesla to do what they are doing. I can’t just pick and choose the laws to enforce. So I give them what I felt was a reasonable period of time to operate the way they were operating. And to go to the legislature and get it changes.

JOHN HARWOOD: The expense of the New Jersey consumers.

CHRIS CHRISTIE: What would you expect them to say? Thanks.

[LAUGHTER]

I mean, listen. Elon’s not happy, because in New Jersey, it is a law that says you can’t do what he did. I don’t like the law either. I didn’t vote for it, I didn’t sign it. I don’t like it, but I don’t get to just ignore the laws I don’t like. So I love “The National Review.” I read it all the time; but they are just dead wrong on this. And the fact is that that’s a problem, all due respect, some of your national guys who parachute into a state-specific issue, listen to a particular interest group that’s in your ear and say I figured it out.

Economics, Pethokoukis, U.S. Economy

Yellen’s big mistake

Is “substantially stretched” the new “irrational exuberance”? Anyway, MKM Partners economist Mike Darda thinks Fed boss Yellen made a big mistake yesterday:

Fed Chair Yellen threw a bone to the financial stability hawks yesterday by specifically mentioning “stretched” valuations in small cap and biotech stocks, social media concerns and the high yield/levered loan market. Although a gathering chorus of hawks on Wall Street and Washington believe this was simply stating the obvious (and, if anything, long overdue), the implications for monetary policy could be problematic. Historically, the Fed does not have a track record of being able to micro manage specific asset valuations without doing more harm than good: the Fed’s attempt to lower commodity prices after WWI and to lower equity prices in 1928-1929 both ended in deflationary depression. In any event, it is far from clear that valuations in the areas highlighted by Fed Chair Yellen yesterday are materially outside where they should be considering low risk free and corporate bond rates, low inflation, a recovering business cycle with low near-term recession risk and a burst of innovation in certain areas of technology. Although we remain in the camp that this will be a longer-than-average business cycle (perhaps 7-10 years), we will watch this issue very closely as the Fed as an institution has a history of fighting last wars.

Follow James Pethokoukis on Twitter at @JimPethokoukisand AEIdeas at @AEIdeas.

Economics, Pethokoukis, U.S. Economy

Why Amity Shlaes is dead wrong about inflation

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Are conservatives forever and always doomed to be obsessed by fear that inflation is perpetually just around the corner? Perhaps, since it was the Great Inflation of the 1970s that helped give rise to Reagan and Thatcher and the conservative revival. Even worse, this inflation obsession spawns conspiracy theories that government is manipulating the data to hide skyrocketing prices.

To be sure, the prices of some things have gone up a lot and continue to rise, such as college tuition. But overall inflation has been quiescent. The Consumer Price Index, including food and energy, has risen by an annual average of just 1.6% since 2008, including 1.5% last year. Is Washington phonying up the numbers? Well, MIT’s Billion Price Project, which “uses prices collected from hundreds of online retailers around the world on a daily basis”  puts US inflation at just over 2% the past year. In other words, the CPI is roughly correct, though your personal mileage will vary a bit. Looking forward, a Cleveland Fed model based on both economic surveys and financial derivatives reports that its “latest estimate of 10-year expected inflation is 1.83%. In other words, the public currently expects the inflation rate to be less than 2 percent on average over the next decade.” Not surprisingly, then, I strongly disagree with the inflation fretting of Amity Shlaes in her new NRO piece, “Inflation Vacation: Things are more expensive than government statistics say they should be.” Here is Shlaes;

All the official numbers, especially the Consumer Price Index, say that inflation is reasonable. Economists you respect tell you the wages are low because of “misallocation of resources.” Janet Yellen, the new Fed chairman, says she’s not worried. Maybe she will have a good vacation.

But other numbers suggest that inflation is higher than what the official data suggest. One set, from which some of the price bites above were taken, is here. For a more thorough review of why official numbers err, have a look at the work of John Williams, a consultant who has tracked data over the years.

Boiled down, Williams’s contention is that several alterations in the way we measure inflation have caused distortion. The Consumer Price Index used to be simple: The government measured the same basket of goods every year. If the price went up, the index captured that. Decades ago, authorities pointed out that people substitute a cheaper item when what they originally bought was too expensive. They altered the index to capture substitution. If steak is expensive, you buy chicken. The result of their fiddle is that inflation looks lower than it would otherwise. That’s disappointing. No vacation is a true vacation without a really good tenderloin.

Conservatives like Shlaes — she is hardly the only one — should really stop using John Williams and his ShadowStats site as source for their inflation arguments. Many economists, not to mention the BLS itself, have given reason to think his approach methodologically unsound. According to one Williams’s calculation, annual inflation has never been below 5% since the mid-1980s and is nearly 10% today.

Think for a moment what that means for real GDP growth the past three decades. Nominal GDP averaged about 5% from 1986 through 2013. Of that 5%, 2% was inflation and 3% was real GDP growth. If inflation was really 5% — and often, according to Williams, it was much, much higher — then there has been no real economic growth in America all that time. Actually, we have probably been in a long depression from the Reagan years forward.

Is that what folks on the right really want to argue? Conservatives should not be so desperate to make the “Obama is Carter” argument or push for a return to the gold standard or to “end the Fed” that they will use any source to back their inflation claims, including sources about which even a quick Google search would raise numerous red flags. Such sloppiness render arguments unpersuasive to anyone but true believers. It also feeds a conspiratorial mindset unhelpful for anything other that creating customers for the numerous gold hawkers on talk radio.

Follow James Pethokoukis on Twitter at @JimPethokoukisand AEIdeas at @AEIdeas.

Economics, Pethokoukis, U.S. Economy

CBO makes clear what Obamacrats don’t: Tax hikes won’t come close to solving US debt problem

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The New York Times is happy that a new Congressional Budget Office report is forecasting slower Medicare spending growth — even if the reason is puzzling. From reporter Margot Sanger-Katz:

The last few years have seen a puzzling and welcome new trend in health care spending: Instead of going up and up, increases have slowed way down. Since health care costs are growing more slowly than they have in decades, they’re making budget forecasts look better and better.

Here’s your trouble: while it is good news that Medicare is now expected to make up 4.6% of GDP in 25 years vs. 4.9% in last year’s estimate, the US budget is still a snowball headed for hell. The above chart shows the 2013 and 2014 long-term CBO estimates under the extended baseline scenario (current spending and tax provisions continue or expire according to law) and alternative fiscal scenario (what is likely to happen to current spending and tax laws).

What more, the CBO report clearly states we cannot just  tax our way out of this problem. As summarized by the Committee for a Responsible Federal Budget:

CBO projects that revenues will also grow as a share of GDP, but from a lower starting point and not as quickly. Specifically, revenues will rise from 17.6 percent of GDP this year to 18.4 percent by 2025, 19.5 percent by 2040, 21.3 percent by 2060 and 23.6 percent by 2085. By comparison, revenue has averaged about 17.4 percent of GDP over the past 40 years.

Over time, CBO projects spending will grow significantly, from more than 20 percent of GDP in 2014 to nearly 23 percent by 2025, 26 percent by 2040, nearly 30 percent by 2060, and nearly 36 percent by 2085. By comparison, spending has averaged about 20.5 percent of GDP over the past 40 years. 

So even though revenue will rise 6 percentage points over historical levels, spending will rise by 16 points over historical levels. Record tax revenue, but also record spending. As I said, there’s your trouble.

Follow James Pethokoukis on Twitter at @JimPethokoukis, and AEIdeas at @AEIdeas.

Pethokoukis, Economics, U.S. Economy

How to save US workers from the robots: A Q&A with entrepreneur Ashwin Parameswaran

Image Credit: Shutterstock

Image Credit: Shutterstock

An important question and a vexing one: Why is the US recovery still so weak? Five years after the official end of the Great Recession, growth remains maddeningly subpar. Folks on the right like to talk about “uncertainty” stemming from President Obama’s economic policies, from Obamacare to environmental regulation to Dodd Frank. Folks on the left have latched onto a theory called “secular stagnation,” cooked up by former Obama White House economist Larry Summers, which see chronic inadequate demand  – partially driven by income inequality — as the big problem.

Blogger, ex-banker, and current entrepreneur Ashwin Parameswaran has an intriguing thesis of his own — much of it concerning automation –outlined in his marvelous essay “Technological Unemployment Amidst Stagnation.” This alternate explanation also attempts to explain why “the “benefits of the current economic recovery have flown disproportionately towards corporate profits with wages and employment lagging far behind.” In this episode of the Ricochet Money and Politics Podcast, I chat with Parameswaran about his ideas. Here are some edited highlights from our chat:

                                                                                                                         

Let’s start by laying out your theory. and then I’m going to try to push back a bit on it.

There are more than two ways of looking at what’s wrong with the economy right now, and there are a lot of contradictory positions. One of the contradictions that a lot of people don’t seem to focus on is the fact that we seem to be worried about technological unemployment and that robots are going to make human beings obsolete. And at the same time, we seem to have this idea that we are in the midst of this great stagnation [as seen in] Tyler Cowen’s great book on this topic.

This essay in particular and a lot of my other work is trying to argue that these two are not opposing phenomena. They both can happen at the same time. The primary argument is really that we are getting a lot of process innovation which means that we are making things that we consume today in a more efficient and cheaper manner which means less manpower. That leads to a lot of technological unemployment. But we are not getting enough product innovation. We are not getting enough disruptive innovation, which means we are not making new products that people consume.

The combination of these two things means that we can have long-run stagnation, but at the same time we get technological unemployment. It’s easy to argue why we have process innovation and technological unemployment because of it. But the larger question is why we don’t have enough disruptive innovation.

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Economics, Monetary Policy, Pethokoukis

Economists overwhelmingly reject GOP’s Fed reform plan. But should that end the argument?

Image Credit: Shutterstock

Image Credit: Shutterstock

The GOP has a big idea on how to reform monetary policy: Get Congress more involved. Economists — and this is not surprising — think that idea is not so good:

Chicago Booth, IGM Forum

Chicago Booth, IGM Forum

As you can see, 90% of the economists surveyed — when ranked by confidence level — disagree with the GOP plan. So, yeah. Kind of overwhelming. And the reason this result is not surprising is that intuition, historical example, and research suggest that without independence, central banks will submit to their political overlords and run the printing presses.

That point of view is reflected in some of the comments from the economists, such as this one from the University of Chicago’s Nancy Stokey: “A central bank should be independent. Look at Argentina as an example of where political oversight leads.” Berkeley’s Carl Shapiro offers the “If it ain’t broke, don’t fix it” defense of the status quo: “The Fed has served Americans very well over many decades; meddling by politicians would worsen the performance of the Fed and the economy.”

But what has been the American experience? And what lessons can be drawn? While conservatives often point to the Great Inflation of the 1970s as an example of the Fed gone wild, both the Great Depression and Great Recession are examples of the Fed crashing the economy by being too tight. Taken together, do they really suggest a Fed that has “served Americans very well over many decades”? Highly debatable, at least.

Perhaps what those examples suggest is that discretionary monetary policy really is problematic. There should not just be a rule, but the correct rule that is clear on what the goal is. As Stanford’s Robert Hall, who disagrees with the GOP idea, states: “Monetary policy should be based on a target for inflation and unemployment (such as difference between the two) not on an instrument rule.”

My preference is for nominal GDP level targeting. Here is Scott Sumner:

My suggestion is that we end the independence of central banks, but replace it with something else–an explicit, legal, central bank target.  Let’s suppose the Congress instructed the Fed to target 2% inflation.  Now assume Congress wants more growth because we are in a recession, but because inflation is currently 2% the Fed doesn’t want to ease.  The fiscal authorities could instruct the central bank to aim for 2% inflation in the long run, but allow a bit more inflation during the current recession, at the expense of a bit less that 2% inflation during the subsequent years.  In other words the Fed would still have some discretion, even though their long-run mandate would be 2% inflation.  They would have the legal authority to tell the fiscal authorities “OK, we’ll provide a bit more inflation right now, as long as you understand that it is being “borrowed” from future inflation.  We intend to run below 2% inflation during the next boom.”  This would allow for some fruitful policy coordination, while still protecting the central bank from pressure to alter its long run inflation target.

You might be thinking; “Lower than average inflation during booms and higher than average inflation during recessions.  What a great idea for macroeconomic stabilization.  How can we formulate that into a simple and easy to understand nominal target?”

Seriously, Congress needs to decide on some sort of explicit policy goal for aggregate demand.  Whether it be inflation, the price level, or NGDP, the point is to have clearly spelled out goals so that they and the Fed are pulling in the same direction.  Indeed if the goals are spelled out, there is no reason why Congress should ever have to do any pulling.

Follow James Pethokoukis on Twitter at @JimPethokoukis, and AEIdeas at @AEIdeas.

 

Pethokoukis, Economics, U.S. Economy

Surprise? Not really: Nations with more generous welfare states are hurt by higher immigration

Image Credit: Shutterstock

Image Credit: Shutterstock

The Economist highlights the key takeaways from a new study of the economic impact of immigration on 20 nations, “Immigration, Search, and Redistribution: A Quantitative Assessment of Native Welfare” by “Michele Battisti, Gabriel Felbermayr, Giovanni Peri, and Panu Poutvaara.”

First, simply shutting the doors would make the native population worse off in 19 of 20 countries. Second, most countries should allow more immigration. As for the US, “a one-percentage point increase in the proportion of immigrants in the population made the native-born 0.05% better off.” (As a side note, some advanced economies have a far greater share of the population that is foreign born, including Canada, Australia, and Switzerland.) Now the third takeaway is the perhaps the most significant:

Life can be tough for immigrants in America … And if you can’t find work, don’t expect the taxpayer to bail you out. Unlike in some European countries, it is extremely hard for an able-bodied immigrant to live off the state. A law passed in 1996 explicitly bars most immigrants, even those with legal status, from receiving almost any federal benefits. That is one reason why America absorbs immigrants better than many other rich countries. … The opposite was true in some countries with generous or ill-designed welfare states, however. A one-point rise in immigration made the native-born slightly worse off in Austria, Belgium, Germany, Luxembourg, the Netherlands, Sweden and Switzerland. In Belgium, immigrants who lose jobs can receive almost two-thirds of their most recent wage in state benefits, which must make the hunt for a new job less urgent.

This would seem to be an important finding! And it is very much in the spirit of what Milton Friedman once said about immigration and welfare state:

Why is it that free immigration was a good thing before 1914 and free immigration is a bad thing today? Well, there is a sense in which that answer is right. There’s a sense in which free immigration, in the same sense as we had it before 1914 is not possible today. Why not?

Because it is one thing to have free immigration to jobs. It is another thing to have free immigration to welfare. And you cannot have both. If you have a welfare state, if you have a state in which every resident is promises a certain minimal level of income, or a minimum level of subsistence, regardless of whether he works or not, produces it or not. Then it really is an impossible thing.

Well, not impossible. But a stingier welfare state does, apparently, help the absorption process, according to this study. Also: the tiny gains from immigration would also suggest more attention needs to paid to composition.

Follow James Pethokoukis on Twitter at @JimPethokoukis, and AEIdeas at @AEIdeas.

Pethokoukis, Economics, U.S. Economy

Remember, 2014 was supposed to be, finally (!), the Year of Acceleration

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An historically bad winter may have frozen the economy last winter, but why was there no equally significant spring thaw? Real GDP decreased at an annual rate of 2.9% — the deepest mid-expansion decline in 70 years — but hopes for a strong second-quarter rebound are fading. The other day I noted that the Atlanta Fed’s real-time GDP forecasting model, GDPNow, was predicting 2.6% RGDP growth in 2Q. And here is how JPMorgan factors in the new retail sales numbers:

Retail sales increased 0.2% in June, which was below expectations, nonetheless the important details used to track real consumer spending were actually better than anticipated. …  Real consumer spending in Q2, which was previously tracking 1.5% annual growth, is now coming in around 1.8%. We continue to project real Q2 GDP growth at 2.5%; prior to today’s number we were tracking about a tenth light, and we are now tracking about a tenth firm. Even with today’s number, consumer spending can’t be described as roaring back from Q1 weakness, but at least it looks like it is returning to a moderate pace of expansion.

Along the same lines, this is what the CEO of discount retailer Family Dollar had to say in his recent earnings call with analysts:

Our observations are it’s still pretty tough out there. The low-end consumer has not benefited in this recovery at all, in fact, I think have slipped further back. Unemployment trends remain high. The government cutbacks continue. There’s quite a bit of health care uncertainty. Coming from this unbelievably cold winter, heating prices, heating oil and gas prices are moving upward. So there is — it’s a tough playing field out there.”

Of course, maybe the rebound will be more apparent in the second half. Certainly some economists argue that. But getting back to JPM note from economist Michael Feroli, “a moderate pace of expansion” would be OK if we were not still trying to close the “growth gap” caused by the Great Recession and Not-So-Great Recovery. As economist David Beckworth notes in a recent WaPo piece: ” … the CBO estimates that GDP is 5 percent below potential, and, even worse, 10 percent below its pre-crisis trend. We’ve only recently made up for the 8 million jobs we lost during the crisis, but we’re still far short of how many we need to keep up with all the population growth the past five years.”

Beckworth goes to discount the current left-wing Unified Theory of Everything, secular stagnation: “A better story is that the economy got hit by a once-in-three-generations crisis that’s taken awhile—too long, really—to overcome. But in the long run, the slump will be dead.” To that explanation, though, I would add a worrisome supply-side story that predates the Great Recession, which could be damaging US growth potential.

Follow James Pethokoukis on Twitter at @JimPethokoukis, and AEIdeas at @AEIdeas.

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