Q4 Preliminary Release and Re-thinking That “Massive” Stimulus

The BEA released its preliminary numbers for 2008Q4 GDP. There was little good news in it, as many have observed. [0], [1], [2], [3] Consumption fell even further than first estimated. In an accounting sense, support from exports collapsed. Even the downward revision in inventories, which might have suggested a production rebound in this quarter, seems to incorporate more of a signal of further anticipated declines in demand, at least given the high inventory to sales ratios. And while declining imports add, in a mechanical sense, to output, it certainly hints at a sustained decrease in anticipated economic activity. Figure 1 shows these GDP components.


q4prel0.gif

Figure 1: Real GDP growth (blue bars), and accounting contributions to GDP growth. NBER defined peak at dashed gray line. All in Ch.2000$ SAAR. Source: BEA GDP preliminary release of 27 February 2009.

This is “news”, insofar as the announcement came in below expectations (-6.2% vs. Bloomberg consensus of -5.4%, and outside the range of forecasts, -3.8 to -6.1). Hence, I think it is of interest to re-consider exactly how “massive” that stimulus bill was in the context of the implied output gap. In this post I argued the stimulus was, in relative terms, anything but massive. Now, I think that argument has even more force (Brad Delong concurs.) Using the CBO estimates, the output gap in 2008Q4 was 4.4 (versus the 3.8% implied by the earlier advance estimate).


q4prel1.gif

Figure 2: Log real GDP, preliminary release (thick blue), advance release (red), mean forecast from February 2009 WSJ survey (green), and potential GDP (black), all in Ch.2000$ SAAR. NBER defined peak at dashed gray line. Source: BEA GDP preliminary and advance releases, CBO estimate of 9 January 2009, and NBER.

It is unusual, in my experience, to be able to easily discern the impact of a revision on the path of GDP in graphs of this type…


My guess is that in a few months as the full import of the recession becomes obvious, a lot fewer people will be characterizing the stimulus as “massive”.

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33 thoughts on “Q4 Preliminary Release and Re-thinking That “Massive” Stimulus

  1. all-the-T-bills-in-China

    One senses that you might be hedging, realiziing deep down that the proposed deficit & money creation will not really do a damn thing beyond boosting a quarter or 2 somewhere at the expense of subsequent growth.
    This year’s deficit will be more than the proposed 1.75 trillion. It will be more likely be on the order of 2.2 trillion–more than 15% of GDP I believe. It will be similar in 2010 if not worse.
    When in 2011, the recovery is pathetic & accompanied by inflation, would that be enough to give you second thoughts about the Keynesian religion?

  2. Johnson

    One senses that you might be hedging, realiziing deep down that the proposed deficit & money creation will not really do a damn thing beyond boosting a quarter or 2 somewhere at the expense of subsequent growth.
    >>>>>>>>That isn’t what “stimulus” is for. It can only politically work if the economy itself is coming out of recession, not artificial boosters
    This year’s deficit will be more than the proposed 1.75 trillion. It will be more likely be on the order of 2.2 trillion–more than 15% of GDP I believe. It will be similar in 2010 if not worse.
    >>>>>>>>Massive deficits caused by massive speculatory bust. What did you expect?
    When in 2011, the recovery is pathetic & accompanied by inflation, would that be enough to give you second thoughts about the Keynesian religion?
    >>>>>>Keynesian religion? Like yours is any better. The US economy will strugge over the next few years anyway you look at it. How can a recovery be weak and have inflation? It is the other way around, only to when producers aggressively slash prices will the economy rebound. It is up to them. Some get it, others don’t.

  3. MM

    I don’t believe most people call this spending bill “massive” on any basis other than that it is “massively” expensive and will come with massive costs. Whether it ‘helps’ or not, it is flatly a massive amount of money, semantic games aside.

  4. GK

    What does ‘potential GDP’ still signify?
    If we are to ultimately get back to that line, it would mean we will get a massive rocket upward, something like 1983 where GDP growth was 7.5% in, say, 2011, just to reach the line.
    Unless someone is willing to suggest that we never reach that line gain.

  5. d4winds

    just a general comment not nec. related to this blog entry in particular:
    I really enjoy this blog. Thanks.

  6. john smith

    Probably it will “help” a little bit. At least the expectations of the near term. But the huge fiscal cost is going to pull down the hopes for the medium run.

  7. Terry

    OK, knowing what we now know re GDP and can reasonably surmise about the rest of the year, two big questions come from your analysis (which i agree with):
    1. What, if anything, will be the effect of the current stimulus package on the sharply deepening recession this year and next (when most stimulus kicks in)?
    2. How big a stimulus is required to stop the downturn and stabilize the economy within the next two years? (This is an economics question, not a political one. And I’m not even sure I want to think about the debt implications.)

  8. Rajesh

    Stimulus obviously doesn’t work. Looking at the first chart, the 2008Q2 GDP was obviously unaffected by the “massive” $600 billion Bush stimulus. Obviously, the economy does whatever it wants to, so the politicians in Washington should just give everyone a big tax cut because it has no effect on the economy. Obviously, government borrowing pays for itself.

  9. calmo

    Cute, Rajesh, snappin “obviously” in our mezzmerized little brain-resistant receptacles once thought to be able to process information…do you find your examination/refutation/confrontation more than a typing exercise?
    Obviously not if you are cutanpastin “obviously”… your fingers (and mo) will soon be laid-off by Ctrl v.

  10. all-the-T-bills-in-China

    Menzie, I apologize for the use of the word ‘religion’.
    My question stands: After 2 years of the gov’t spending on the order of 15% of GDP/yr more than it taxes (in the presense of the Fed ‘printing money’ at a ferocious rate), if the US recovery is miniscule, would that be a sufficient phenomenon to cause you to question Keynesian thought? If not, what would it take?

  11. W T F

    Rajesh, Bush’s 2008Q2 stimulus was $168 billion as reported by the Wall Street Journal on Feb 8, 2008 on this page behind the wsj.com pay firewall:

    http://online.wsj.com/article/SB120248013160553829.html

    Where did you come up with your ["massive" $600 billion Bush stimulus] figure? And if stimulus “obviously” doesn’t work why did Republican Senators vote overwhelmingly for the bill and why did President Bush bother to sign it?

    We’re all Keynesians now. Hoocoodanode?

  12. ReformerRay

    The size and nature of the stimulus is secondary to the toxic assets that remain on the books of U.S. banks and insurance companies.
    If the federal govenment would just declare that the private sector has choosen to exclude the federal government from all control over or knowledge of the process of securitization and deriatives, therefore, the federal govenment will provide NO, NONE, funds to pay debts related to these processes that the private sector cannot pay.
    That would provide the “details” investors are arguing they want – only they really want the opposite answer. Now that we have made a mess of things, we seek public help.
    The Federal government should backstop all contracts entered into to raise capital for banks and insurance companies or to bet on the future value of a real thing (pork bellies, houses, oil, etc.) – provided those contracts were traded on public, regulated exchanges and did not involve securitization or derivatives.

  13. all-the-T-bills-in-China

    To amplify the point about the size of the deficit ‘stimulus’, the deficit will swell well past the planned $1,750,000,000,000 to well above 2 trillion. (This is because tax reciepts will decline severely from what is presently anticipated.) The entire proposed budget is $3.94 trillion. Even if you ignore the dishonesty of including SS reciepts, the gov’t will spend twice as much as it taxes. And they will do that again if not more in 2010–if the bond market will allow it.
    Borrowing 15% of GDP. Spending twice as much as you tax. So again, how massive must it be to be to provide a true test of Keynesianism?

  14. ECheno

    Menzie – what is your view of
    the economic assumptions used in the President’s budget? Do you think your scrutiny and commentary would have been different six months ago? In the 30′s, increased govt spending was combined with tax increases, thereby undermining the effectiveness of the spending. Do you worry that we are seeing the same policy prescription today (including the collection of “climate revenues”)?

  15. JD

    GK:
    Potential GDP is a CBO estimate of the level of output attainable when the economy is operating at a high rate of resource use, aka full employment and capital utilization, but does not pose a severe inflationary threat. Eventually, the economy will return to the CBO estimate, but the cumulative GDP deficits are one way to measure the severity of the recession.

  16. GK

    JD,
    Yes, the severity of the recession is another matter.
    But SOMEDAY, the economy will return to the CBO potential GDP line. Whether that is 2010, 2011, 2012, 2013 or whatever is unknown. But if it is to return to the line someday, that would be a massive growth surge at that time (again, like 1983 where GDP grew 7.5%).
    Thus a person with a horizon of 5 years or more should still be long on equities at this stage.

  17. Get Rid of the Fed

    Jim Glass said: “Are we saying the just-released budget is unrealistically optimistic in projecting 3.2% GDP growth (the second-highest rate in 10 years) for 2010?”
    Unrealistic, probably!
    Johnson said: “How can a recovery be weak and have inflation?”
    How about capacity reductions, a lower dollar, and negative real earnings growth? Possible?
    About Keynes: From what I understand, he would not advocate deficit spending in the countries with current account deficits. I could be wrong about that.

  18. GK

    The WSJ mean forecast is still saying the trough is going to be in Q209, as per the chart.
    I am saying it will be in Q309.

  19. BruceB

    I’m sort of stunned that someone is trying argue this stimulus and the resulting deficit isn’t massive. It’s massive by almost every measure. When we stop thinking it is, then we’re in big trouble. If as someone points out the deficit is more like 2.2 trillion, then it will be as much real debt as the total added the past 8 years, when we supposedly had massive deficits.
    If not now, at what point does it become massive?
    Another question. At what point does % real debt burden (not gross) become a problem? When it was close to 50%, the net interest payment was around 15% of the budget and climbing. With low interest rates it’s not a problem, but what are the risks of us ending up with much higher debt, in the 70% GDP range, and much higher interest rates??

  20. BruceB

    About that first chart, those diving export numbers are worrisome. Anyone else see this as a building problem that may keep GDP down longer than expected?

  21. gaius marius

    After 2 years of the gov’t spending on the order of 15% of GDP/yr more than it taxes (in the presense of the Fed ‘printing money’ at a ferocious rate), if the US recovery is miniscule, would that be a sufficient phenomenon to cause you to question Keynesian thought?
    i’ll say this — while keynesian dynamics unquestionably do exist, i think what this crisis is going to do is reveal that the political limitations in a deliberative society are far lower, in a large crisis, than what keynesian modeling would suggest needs to be done. i think a lot of people lost sight of the real lesson of japan — which is that political willpower is a severe limiting factor. japan, for what its worth, had the benefit of uncontested one-party rule with massive corporate support when their crisis hit — and, honestly, i think their case is going to be viewed in retrospect as a relative success under impossible circumstances. what we have is quite a bit more fractious; i don’t really find it surprising that we cannot get it done.
    considering as well that we don’t have the exit pathway japan had — massive domestic savings, huge unimpaired export markets — i don’t see a good reason to expect as positive an outcome.
    just wait until we actually try to balance the budget to satisfy the obsessive opposition in 2011 or 2013. or worse, if/when the dollar breaks down.

  22. Johnson

    “But leftism certainly is a religion”.’
    Leftism is a myth. Just like the myth the Soviet Union actually existed without Wall Street and the Capitalists creating it(as they did).
    Hetreo, I know the truth. You don’t have to play dumb with me.

  23. Menzie Chinn

    MM: So you don’t normalize variables? Must be hard to carry on a conversation when discussing the price of a movie today compared to 1930…

    Terry: As the modelers say, the macroeconometric models are approximately linear around the baseline, so you can use the deviations from counterfactual laid out in the CBO’s estimates (discussed here), and apply them to your baseline.

    all-the-T-bills-in-China: Hardly a scientific way to conduct research. The way I would analyze the impact is to (i) take into account all the shocks that occurred that weren’t in the baseline (CBO for instance) to figure out what the economy would’ve done in the absence of stimulus but including the shocks, and then (ii) see if the actual outcome equals what was predicted by the models. In the forecasting literature, this is called an ex post historical simulation. While it is difficult to do completely right with this many variables in such a complicated system, one could do a back-of-the-envelope analogue.

    ECheno: As Jeff Frankel has pointed out, along many dimensions, this budgeting process is much superior to what occurred under the previous Administration (e.g., “assume away Iraq” so that the budget balances… — see this post). I will take a look at the budget economic forecasts in the coming days. You can tell me then if I have changed my mode of assessment. By the way, what’s wrong with taking into account revenues from auction of emissions rights?

    Orlando: Thank you for the tightly argued comment.

  24. calmo

    My last comment was so tightly argued it did not make it past the firewall…waterfall, something. In which itwas observed that the truth is as difficult to transcribe as it is to translate to those of us who demand more action and less dialog than that snorable movie…
    Now with the prolegonema out of the way, can I tighten up?
    gaius marius, if you had a less frighteningly latin handle, I could get tight with you. What you said and mo esp with Japan being a subordinate national economy –if the current US political structure doesn’t now strike you as “uncontested one-party rule with massive corporate support”, nothing will.
    The most ingenuous quote on the board:

    I’m sort of stunned that someone is trying argue this stimulus and the resulting deficit isn’t massive. It’s massive by almost every measure. When we stop thinking it is, then we’re in big trouble.

    Bruce, are you a fan of David Byrne’s “Stop Making Sense”? This is as good…and even if you are not a Talking Heads guy, that was/is mighty.
    Dang. What if he is a Mozart guy, calmo?
    Ok, Bruce, I think your’s is a mighty little concerto.

  25. Tomato_Thrower

    I think the real question when discussing Keynesian policy is at what point does the dollar devalue in a signifiant way? While we are experiencing deflation right now, at what level of dollar creation does our debt begin to be unattractive? Between our severe recession, the stimulus measures, the consumption of existing inventory and reduction in production, and the ever increasing dilution of our debt, I can’t see how we will escape significant inflation in the next two or three years.

  26. Vangel

    No wonder the country is so screwed up. I read posts by people who are supposed to be intelligent and find that they waste their intellectual capabilities by believing in false economic theories that have been discredited by history. Keynesian thinking will not work because planners are incapable of running an economy. Of course, what passes as Keynesian thinking is a reinterpretation done by his followers. Keynes’, General Theory, is such a muddled and incoherent work that it is doubtful that even Keynes knew what he really wanted to say. It is most likely that the book was simply written to legitimise a power grab by government bureaucrats and a move towards socialism.

  27. DickF

    The American Republic will endure until the day Congress discovers that it can bribe the public with the public’s money.
    Alexis de Tocqueville

  28. ellens

    The only fiscal policies that have resulted in sustainable economic recovery are large permanent tax cuts with regulation reduction and predictability. Yes, it is slow, and yes, government has to eventually shrink. Yes, it means no redistribution and no bailouts. No fun for government wonks at all. But there is no other way. Let’s hope that someday we take it.

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