GDP Growth: Solid but not spectacular <br /><ul><li>GDP has grown six straight quarters; 2.8 percent revised growth rate for Q4
Q4-over-Q4 growth rate for 2010 was 2.7 percent—a bit higher than long-run potential GDP growth, but not much
Recovery comparable to two most recent recessions, but lags recovery from previous deep recessions of 1975, 1982.</li></ul>4<br />
Breaking GDP into its components<br /><ul><li>Econ 101: Y = C + I + G + NX
Can break level of GDP up into its component parts: consumption, investment, government and net exports
Can do the same thing for GDP growth rate—can break it into parts due to growth of each component
Rule of thumb: component’s contribution to GDP growth equals </li></ul> (Growth rate of component) * (Component’s share of GDP)<br /><ul><li>For example: consumption spending is about 70 percent of the economy
Therefore, consumption’s contribution to GDP growth is about </li></ul> (0.7) * (Growth rate of consumption spending)<br /><ul><li>In 2010Q4, consumption grew at 4.1 percent; it’s contribution to GDP was 2.88 percentage points </li></ul>5<br />
Looking under the hood of GDP<br /><ul><li>Handoff of recovery from inventories to sustainable final demand
Consumption accelerated sharply in Q4, led by almost 30 percent annualized growth in auto sales
Equipment and software slows down a little in Q4 but remains solid
Residential and nonresidential construction have not joined party
Net exports extremely volatile quarter to quarter—partly measurement problems with oil imports, but exports grew 8.5 percent annualized in Q4</li></ul>6<br />
Labor market: slowly moving in the right direction<br /><ul><li>Private sector jobs have grown 11 straight months; over 1.3 million private jobs added over that span.
Recent forecasts point to accelerating recovery in 2011<br />11<br /><ul><li>Analysts have raised their short-term forecasts in recent weeks. Forecasts for 2011 are centered around 3.5 percent. December tax cut deal and surge in consumption, exports in Q4 help explain improved outlook.</li></li></ul><li>12<br />Recent Data: some very encouraging signs…<br /><ul><li>Consumer confidence surging
Michigan, Conference Board measures now at highest level since early 2008.
Institute for Supply Management (ISM) manufacturing growth index highest since May 2004
Employment component of ISM highest since 1973; export component highest since 1988
Nonmanufacturing ISM out today; January index highest since 2005
Unemployment Insurance claims have dropped to lowest levels since July 2008
Other data also show drop of inflows into unemployment</li></ul>12<br />
Hard data for Q1 not strong so far—but with an asterisk<br /><ul><li>Real Personal Consumption Expenditure dropped 0.1 percent in January; data so far suggests only 1.2 percent annual PCE growth in Q1
Core durable goods shipments (excluding defense, aircraft) down 2 percent in January; new core orders down 7 percent.
Taken at face value, limited data so far suggests equipment and software spending will fall in Q1
Private payrolls up only 50K in January, well below expectations for 150-200K private payroll jobs.
February jobs report will be released tomorrow morning
How to reconcile weak hard numbers with strong survey evidence?
Bad weather in January depressed payrolls, and possibly PCE
In recent quarters, durables spending has been weak in first month, grown strongly in 2nd and 3rd month.
We look for numbers to bounce back strongly in February.
February auto sales jump sharply: over 6 percent in just one month </li></ul>13<br />
Housing: prices are starting to decline again<br /><ul><li>House prices trending down in recent months.
Case-Shiller/S+P house price index down 2.4 percent in 2010 (December to December); FHFA index down 3.3 percent; CoreLogic down 5.5 percent.
Recent forecasts call for continued declines in 2011 and 2012, although at a much slower pace than in 2007-2009.</li></ul>14<br />
Housing: too much supply, not enough demand<br /><ul><li>Prices are falling because of adverse supply and demand conditions
Home sales have been weak since expiration of home buyer tax credit in April 2010, although they did jump in December
Supply is elevated because of overbuilding during mid-1980s, and because of large overhang of distressed properties
Mortgage delinquency rates fell sharply in Q4, suggesting that inflows of new homes into distress will slow down.</li></ul>15<br />
Impact of housing market on GDP <br /><ul><li>How will weak housing market affect GDP?
Direct effect: residential construction will remain low until excess supply worked off.
Indirect effect: declining prices could slow down PCE growth by reducing home equity.
Fortunately, recent price declines have been mostly concentrated in distressed homes, limiting impact on consumer spending.</li></ul>16<br />
17<br />UPSIDE AND DOWNSIDE RISKS TO THE ECONOMY<br />
Upside risk: normal business cycle dynamics<br /><ul><li>While recovery is projected to accelerate in 2011, growth at 3.5 to 4 percent is still below what we might expect from a recovery from a deep recession
Following the 1982 recession, real GDP grew 7.7 percent (Q4 over Q4) in 1983, and 5.6 percent in 1984. Following the 1975 recession, economy grew 5.0 percent in 1977 and 6.7 percent in 1978.
Typical business cycle dynamics that support rapid growth during a recovery:
The virtuous cycle: as businesses create more jobs and expand capacity, consumption and investment demand will accelerate…which will businesses to create more jobs and further expand capacity.
Will surge in PCE in Q4 trigger strong hiring in 2011?
Durable goods catch-up: should promote sharp acceleration of consumer durables, business equipment and (eventually) residential investment.
Consumer durables surged 21 percent in Q4, led by cars.
Rising population and household formation will drive housing demand in the long run. </li></ul>18<br />
Downside risk: oil price shock <br /><ul><li>Crude oil up about $10/barrel over past 10 days, to around $100.
Gas prices are up about 25 cents to $3.44 per gallon over past 2 weeks.
Sustained $10 increase will reduce real GDP about 0.1 percentage point this quarter, about 0.25 ppt after one year.