On Thursday the government will release its estimate of GDP growth in the third quarter. The number is expected to be something like 35%. Three bits of arithmetic context followed by some advance interpretation.
1. The reported growth of -31.4% for Q2 was less bad than the headline because it was an annualized number--which is what would happen if the economy contracts the same way 4 quarters in a row. The economy really shrunk by 9.0%.
Similarly if the headline growth rate on Thursday is 35% then it will mean the economy grew at 7.8% for the quarter. That is also very, very high--just the better way to think about it.
2. If the economy shrinks by 10% one quarter and grows by 10% the next quarter it will still end up below where it started.

This is because the growth is off a smaller base: if you start at a 100 then a 10% decline takes you to 90 and a 10 percentage increase takes you up to 99.
If the actual annualized growth rate is 35% for Q3 (so 7.8% growth for the quarter) the actual arithmetic would leave GDP 3% below its 2019-Q4 level and ~5% below the prior trend level.

For context, this is roughly where the economy was in 2008-Q4 relative to 2007-Q4.
3. GDP growth for Q2 is a weighted average of monthly growth rates that is roughly equal to:

(1*May + 2*Jun + 3*Jul + 2*Aug + 1*Sep)/9.

Based on the monthly numbers it appears as if 2/3rds of what is called Q3 growth actually happened in May and June, before the quarter began.
Interpretation:

The bad:

--Q3 GDP is a pretty distant rear-view mirror, mostly telling us about five months ago. Now we have virus surge and no stimulus.

--The economy still has a pretty sizable hole and a lot is needed to fill that hole.
Some mitigating:

--The level of GDP in Q3 was higher than I and many others expected.

--Consumption growth, especially in May and June was very high, partly due to reopening/reduced fear but also because incomes were protected by UI, PPP and stimulus checks under the CARES Act.
And of course:

--GDP is an aggregate, it tells you nothing about distribution. The economic shock has been very regressive, hurting the vulnerable the most. The initial policy response was very progressive (although still left too many out) but that has now ended.

More needed!

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More from @jasonfurman

26 Oct
When economists frame a non-consensus view as obviously correct economics (or even worse "arithmetic"). It devalues the currency of consensus economic views. Take a stand and defend it, just don't claim obvious truth. Eg, @caseybmulligan on fiscal policy. nationalreview.com/2020/10/paul-k…
Casey argues UI and other transfers do not increase total demand because we cannot simply count the additional spending associated with them without also counting "the spending (both consumption and investment) of those who finance the government."
The CARES Act was not paid for w/ current tax increases. @caseybmulligan knows that but appears to be arguing in support of "Ricardian equivalence"--that it will be paid for by future tax increases & rational people anticipating those will cut back on their spending now.
Read 13 tweets
7 Oct
To describe anything as "Trump's Economic Dream Comes True" even pre-pandemic is rewriting an awful lot of the history of confident statements about 3% growth--with John Taylor being the most prominent economist making those predictions.

wsj.com/articles/trump…
Gary Cohn, as NEC Director, predicted 4% growth with total confidence. washingtonexaminer.com/trump-adviser-…
Randall Stephenson (then Chair of the BRT and ATT CEO), said he saw no way the tax cut passes and we don't get 3% growth--again total confidence. (Quick search failed to find the quote, if anyone has it please share.)
Read 7 tweets
6 Oct
How should we think about the ideal size of fiscal stimulus right now? A thread with two approaches: (1) top down (based on filling the macro hole) and (2) bottom up (based on protecting people).
Three distinct issues:

(1) When do we need money? Simple: two months ago.

(2) How long do we need money? As long as it takes, could be years, ideally would have triggers to continue after Congress is fatigued.

(3) How much per month? Rest of thread is on this question.
A top down approach would ask what the output gap is and what the multiplier is. CBO's July forecast put the output gap at 6% in Q4, at a time when they expected the UR to be 10.5% this quarter. So presumably they would say something smaller, maybe 4%. cbo.gov/system/files/2…
Read 17 tweets
6 Oct
In my oped in @WSJopinion arguing for the Biden tax plan--and the investments it pays for--I cited seven studies about its impact on the economy. One tweet for each study--plus a bonus tweet in this thread.
The @BudgetModel finds the tax+immigration plan would increase the GDP level by 1.5% in 2050 (rounds to 0.1pp higher annual growth rate).

They do not estimate taxes only but based on other work the effect on growth is close to zero and wages is positive. budgetmodel.wharton.upenn.edu/issues/2020/9/…
@AEI co-authored by @kpomerleau found ~0 effect: "Biden’s proposals would reduce GDP by 0.06 percent over the next decade, slightly increase GDP the second decade (0.07 percent), and result in a small reduction in GDP in the long run (0.2 percent)." aei.org/research-produ…
Read 13 tweets
6 Oct
My latest @wsjopinion explains why the Biden tax plan—and the economic program it funds—would help ensure we have more shared growth. wsj.com/articles/biden…
I know of four estimates of the full Biden fiscal (or fiscal + economic plan), all four show it would be positive for growth: Goldman Sachs (gated), @BudgetModel , Oxford Economic, and Moodys.
budgetmodel.wharton.upenn.edu/issues/2020/9/…
f.hubspotusercontent10.net/hubfs/2240363/… moodysanalytics.com/-/media/articl…
In addition two other estimates have been done of his tax plans alone. @AEI finds it has close to zero effect and the @TaxFoundation finds it would lower growth rates by an imperceptible amount over the next 30 years (not even enough to round to 0.1 percentage point).
Read 4 tweets
2 Oct
We have an economy with a positive first derivative and negative second derivative—everything is continuing to improve but it improving at a slower pace than before.
Normally 661,000 jobs would be something to celebrate. But when you’re 11 million jobs short of where you were in February the slowing pace of recovery is a worry.
Three reasons for it:

1. Easy recovery already happened. Has been people being called back from temporary layoff, permanent unemployment rising.

2. CARES Act expired.

3. Virus resurgence.
Read 5 tweets

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