Download How Can GDP Accounts Be Made More Effective for Business

How Can the GDP Accounts Be
Made More Effective for Business
Cycle Analysis? By Brent Moulton
Discussion of Issues
Robert J. Gordon
BEA Advisory Committee Meeting
November 7, 2008
I am Here in Two Roles
 Member of This Committee Serving as a
Discussant
 Perhaps more important, Member of the
NBER Business Cycle Dating Committee since
1978
 Brent motivates his comments with this
quote:
 “The [NBER Business Cycle Dating Committee]
views real GDP as the single best measure of
aggregate economic activity.” (NBER, Oct 21,
2003)
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Themes of My Discussion
 Substantive Issue: Is Real GDP the Right
Metric as Contrasted with Alternatives?
 For instance, Command Economy GDP examined
by Marshall Reinsdorf this afternoon
 Why are we Asking this Question?
 Different Dynamics of Real GDP and Employment
now in 2008 and also in 2001-03
 Beyond Substance: What can the BEA do to
Communicate More Clearly What People
Want to Know?
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The Primary Question: Is Real GDP the
Right Concept for Business Cycles?
 Consider Real GDP vs. Command
Economy Output
 As Explained by Marshall R, Command
Economy Excludes Net Exports and
Uses Different Deflators
 But do we Want to Exclude Net
Exports?
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Traditional NBER Definition of Business
Cycles
 A recession is a significant decline in economic activity spread
across the economy, lasting more than a few months, normally
visible in real GDP, real income, employment, industrial
production, and wholesale-retail sales.
 How Could we Exclude Net Exports?
 Exports generate real income, employment, and industrial
production
 Imports subtract from consumer and investment spending real
income, employment, and industrial production
 Marshall Reinsdorf’s Presentation Shifts the Focus from
Production to Consumption. His Contribution Chart shows that
the 2008:Q2 Spike in Real GDP Growth is eliminated for
consumer purchasing power by higher oil prices.
 But the NBER Business Cycle Concept is about Domestic
Production, not the buying power of the Domestic Consumer
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More About Production vs. Consumption
 Consider Four Scenarios in Periods 1 and 2
 A: Production 100 in 1 & 2, Consumption 100 in 1 & 2. We
would all agree, no business cycle.
 B: Production 100 in period 1 and 95 in period 2.
Consumption 100 and 95. Yes there’s a business cycle
 C: Production 100 in 1 & 2. Higher imported oil prices
reduce real consumption in period 2 to 95. This is not what
the NBER means by a business cycle (there may be
subsequent multiplier effects)
 D: Production 100 to 95. Lower imported oil prices allow
consumption to be 100 and 100. This is the key example –
yes it is a business cycle.
 Eliminating pure price effects is analogous to
excluding capital gains from GDP
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Back to Substantive Problem for BCDC
 In 2008 the decline in employment led
the decline in GDP
 In the first half of 2008, real GDP
registered a positive change while
payroll employment declined in every
month
 Why would Employment lead Output
after a Long History when Employment
Lags Output?
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Change in TE Output &
Hours
15
10
Real GDP
Percent
5
2.05
0
-0.34
-5
Total-Economy Hours
-10
1955
1960
1965
1970
1975
1980
1985
Year
1990
1995
2000
2005
8
Characterizing the NBER Dilemma
 In earlier postwar Business Cycles, decline and
recovery of output and hours was almost
simultaneous
 In 1990-91 and 2001, hours lagged behind as output
recovered
 The early lead downward of hours and employment
in 2008 raises questions about what was special
about real GDP in the first half of 2008
 Can BEA help to quantify the hypothesis that shift
from construction to exports represents a
compositional shift to higher productivity industries?
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Should BEA Publish Monthly GDP?
 Should BEA Publish Monthly GDP?
 BEA Already Publishes monthly Personal
Income and Consumption
 And other variables
 Would BEA’s version of monthly GDP be
better or worse than Macro Advisors?
 I’ll encourage comments on that question
 The next slide shows how the BCDC examines
time series
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What the BEA Could do that is New
 Monthly GDP? This has already been done
by Macro Advisors (peak month below is
12-07)
Monthly real GDP, from Macro Advisers
1.04
1.02
Ratio to peak
1.00
0.98
2001
0.96
Current
0.94
0.92
0.90
-18
-14
-10
-6
-2
2
6
10
14
18
Months around peak
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Some of Brent’s Alternative Concepts
Don’t Matter (and he probably agrees)
 How Could Subtracting Something Smoothly
Changing alter a Business Cycle
Interpretation of Real GDP?
 Net domestic product (NDP) – deducts charge for
capital depreciation.
 Gross/net national income – adds net income
receipts from the rest of the world.
 Purchasing power of income
 “Wealth – expanded reconciliation with flow of
funds accounts to include changes in net worth.”
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Next Brent Turns to Wage Measures
 The discrepancy between BEA compensation
per hour and BLS real weekly wage
 Different numerators
 Different price indexes
 This has been noted before in the context of
growing inequality (Dew-Becker and Gordon,
BPEA, 2005, Table 2)
 But it is an issue involving long-run growth
and rising inequality, not business cycles
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Estimates of GDP trend
 There is an argument that the BEA could
offer supplemental information on changes
in real GDP relative to trend
 But please don’t use Brent’s “trend” which is
too short-run to be useful – note how it
“bends” in the 2001 recession
 Contrast it to my trend (updated from 2003
BPEA)
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-2
www.bea.gov
08:3
08:1
07:3
07:1
06:3
06:1
05:3
05:1
04:3
04:1
03:3
03:1
02:3
02:1
01:3
01:1
00:3
00:1
99:3
99:1
Percent
Brent’s Trend
Percent Change: Real GDP and Trend
8
6
4
GDP
2
Trend
0
Date
15
Real GDP, 8-quarter Actual Change
vs. Kalman Trend, 1955-2008:Q2
8
7
6
Percent per Year
5
4
3
2
1
0
-1
-2
1955
1960
www.bea.gov
1965
1970
1975
1980
1985
Year
1990
1995
2000
2005
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Presentation and Communication
▪ Provide Graphical Interpretation on
BEA web site. The topics could change
each quarter
▪ Highlight the role of oil prices in
driving a wedge between production
and real income concepts as in
Marshall’s decomposition
▪ Highlight the opposing contributions of
residential housing and net exports
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Contributions, 2-quarter changes,
aggregated to five components
6
5
Total GDP
4
Consumption
Percent
3
2.10
2
1.94
Residual
1
0.93
0.11
0
Net Exports
-0.87
-1
Residential Investment
-2
2004
www.bea.gov
2005
2006
2007
Year
2008
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BEA Web Site: Improvements
Needed
▪ Home Page: Need Middle Section (like
old BLS home page) highlighting
current big news
▪ Could have clickable links to analytic
charts, e.g., Marshall’s or my type of
contribution breakdown
▪ Clickable links to “Current puzzles
about GDP and the business cycle”
▪ And please clean up initial GDP page!
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