FRBSF: The Current Economy and the Outlook

FRBSF FedViews:

John Fernald, senior research advisor at the Federal Reserve Bank of San Francisco, stated his views on the current economy and the outlook as of January 12, 2017.

Recent data confirm that the economy has picked up from its modest pace of the first half of 2016. Indeed, in the third quarter of 2016 GDP growth was revised up from an annualized rate of 3.2% to 3.5%. This rapid pace in part reflected transitory factors such as inventory accumulation and agricultural exports. Going forward, GDP growth is likely to remain for some time a bit above its long-run trend of 1½% to 1¾%. The fundamentals of consumer spending remain healthy, including solid income growth and strong household balance sheets. And business capital spending is poised to rebound from its weak pace of the past several years.

Employment gains remain solid. Nonfarm payroll employment rose by 156,000 jobs in December. Unusually cold weather in many parts of the country appear to have held down those job gains somewhat. However, even without controlling for weather, the pace of gains remains well above the “breakeven” level needed to absorb new entrants to the labor force, which we estimate at roughly 80,000 new jobs on average per month.

The labor market remains near its sustainable, full employment level. The unemployment rate in December ticked up to 4.7%, a touch below our estimate of the natural rate of unemployment of 5%. The December unemployment rate was the lowest end-of-year rate since 2006.

Inflation remains below the Federal Reserve’s 2% objective, but has been gradually increasing towards the target rate since early 2016. Overall consumer prices, as measured by the price index for personal consumer expenditures, were 1.4% higher in November than a year earlier. Core consumer prices, which strip out volatile movements in energy and food prices, were 1.6% higher. With a tight labor market and the waning effects of past energy price declines, we expect overall and core consumer price inflation to run just a shade below 2% this year.

Interest rates have risen sharply since the election in early November. In addition, the Federal Open Market Committee as widely expected raised its target for the federal funds rate at its December meeting. At the post-meeting press conference, Federal Reserve Chair Yellen noted that the decision to raise the fed funds target was “a reflection of the confidence we have in the progress the economy has made and our judgment that progress will continue.”
There is considerable uncertainty about the scope of policy changes that might be implemented under the incoming administration and about their effects on the Federal Reserve’s dual-mandate objectives of maximum employment and price stability. Of particular focus are possible changes in Federal tax and spending policy.

Federal revenues fell short of federal outlays in 2015, leaving a deficit of about 2½% of GDP. There are conflicting political pressures that could influence the path of future government spending. On the one hand, there is some desire to restrain spending in order to keep the budget deficit down. On the other hand, there is some desire to increase military and infrastructure spending, while an aging population will put upward pressure on Social Security and Medicare spending.
Federal spending as a share of GDP typically goes up in recessions and stabilizes or falls in expansions. That was particularly true in the past decade. The Great Recession of 2007-09 lowered GDP deeply, and, to help cushion the downturn, the government increased spending under the 2009 American Recovery and Reinvestment Act. Since 2010, the spending share has fallen as the economy has grown and the temporary stimulus package ended. In addition, budget caps implemented in 2011 have constrained spending. Given the competing political pressures, our forecast assumes that the path of overall federal spending remains unchanged although there may be shifts in composition.

Federal revenue as a share of GDP typically goes down in recessions and rises in expansions. For example, with a progressive tax system, the average tax rate falls when income falls. As with spending, this pattern was especially pronounced in the Great Recession. Revenues as a share of GDP are currently close to their average levels over the past few decades. Our forecast assumes that there will be reductions in individual and corporate taxes amounting to about 1 percent of GDP.
All else equal, tax cuts boost household and business income. Although the details of the tax cut matter, a plausible estimate is that desired spending may rise by perhaps 0.6 percent of GDP. (Households and businesses will try to save the rest.) However, because the economy already is near full employment, this increase in desired spending likely will be dampened somewhat by higher interest rates and a stronger dollar. On balance, we expect that tax cuts will raise the level of GDP by a total of about 0.4%. Since it is likely to take time for the legislation to be passed and for the increase in spending to occur, we expect that tax changes will boost our growth forecast by 0.1% to 0.2% for the next few years.
The views expressed are those of the author, with input from the forecasting staff of the Federal Reserve Bank of San Francisco. They are not intended to represent the views of others within the Bank or within the Federal Reserve System.

Links for 01-18-17

Biden “We Have No Freakin’ Idea What Trump’s Gonna Do”; Biden Announces 2020 Presidential Campaign

In the sappiest of sappy interviews, outgoing vice president Joe Biden looks back, and forward. ‘I Wish to Hell I’d Just Kept Saying the Exact Same Thing’ says Biden in a New York Times interview.

The title is cryptic but it pertains to a speech Biden gave in July that he wishes he repeated more often instead of attacking Trump.

Clear, Concise Brexit Idea From Theresa May: “No Deal Better Than Bad Deal”

The British pound surged nearly 3% today after UK Prime minister Theresa May added clarity to the Brexit decision. “No deal for Britain is better than a bad deal for Britain,” sad May.

Currency traders were convinced a hard Brexit would kill the pound, instead it rallied. And the decline in the US dollar index, widely attributed to Trump statements, has at least as much to do with May statements.

Regardless, the UK is striking the right tone at last.

The Economics of the Affordable Care Act

Dean Baker at INET:

The Economics of the Affordable Care Act: The Affordable Care Act (ACA), which President-elect Donald Trump and the Republican-controlled Congress have vowed to repeal, was crafted to overcome two basic problems in the provision of health care... First, the costs are incredibly skewed, with just 10 percent of patients accounting for almost two thirds of the nation’s healthcare spending. The other problem is asymmetric information: Patients have far more knowledge about the state of their own health than insurers do. This means that the people with the largest costs are the ones most likely to sign up for insurance. These two problems make it impossible to get to universal coverage under a purely market-based system. ...
Covering the least costly 90 percent of patients is manageable, but the cost of covering the least healthy 10 percent is exorbitant. ...
The ACA gets around this problem by requiring that everyone buy insurance — a mandate that allows people with serious health problems to get insurance at a reasonably affordable price. Since many people cannot afford an insurance policy even if it’s based on average costs, the ACA also provided subsidies to low and moderate income people. It pays for the subsidies primarily through a tax on the wealthiest households, those with incomes over $200,000.
Thus far, the ACA has actually worked better than expected in most respects. ...
Insofar as the ACA has run into problems, those have been attributable to too few healthy people in the health care exchanges, and too little competition among insurers. Many commentators have wrongly blamed the problem in the exchanges on a failure of young healthy people to sign up for insurance. This is not the cause of the problem, since more people are getting insured than had been projected. The reason fewer healthy people are showing up on the exchanges is that fewer employers dropped insurance than had been projected. ... By continuing to provide insurance for their workers despite the ACA, employers are effectively keeping healthy people out of the exchanges.
The other problem with the exchanges has been limited competition, as many insurers have dropped out after the first few years. The loss of competition has meant higher prices. ...
One way to make insurance more affordable would be to reduce the costs of the health care system as a whole. Americans pay twice as much per person as people in other wealthy countries, with few obvious benefits in terms of outcomes. But such cost cutting would mean reducing the incomes of drug companies, doctors, and insurance companies — the big winners under the current system. It seems unlikely the Republicans will go this route. They are more likely to restore a version of the pre-ACA situation, in which many more people are uninsured and most workers know that their insurance is only as secure as their job.

No Agricultural Economist Was Harmed–Let Alone Interviewed–During the Making of this Article

Marc Bellemare:

No Agricultural Economist Was Harmed–Let Alone Interviewed–During the Making of this Article: This past weekend, the New York Times ran an article about the kinds of food SNAP recipients purchase, based on a new USDA report.

Here is how the NYT article began:

What do households on food stamps buy at the grocery store?
The answer was largely a mystery until now. The United States Department of Agriculture, which oversees the $74 billion food stamp program called SNAP, has published a detailed report that provides a glimpse into the shopping cart of the typical household that receives food stamps.

The findings show that the No. 1 purchases by SNAP households are soft drinks, which accounted for 5 percent of the dollars they spent on food. The category of “sweetened beverages,” which includes fruit juices, energy drinks and sweetened teas, accounted for almost 10 percent of the dollars they spent on food.

Had the NYT’s intention been to provide arguments to those who wish to dismantle SNAP–a program which, in 2014, provided an average of $125 to spend on food to 46.5 million Americans with low or no income; that’s one in seven Americans–it wouldn’t have done a better job. This is especially given that title: “In the Shopping Cart of a Food Stamp Household: Lots of Soda.”

My Twitter feed came alive with (justified) criticism of the article. My University of Minnesota colleague Joe Soss wrote a long response on his Facebook page which should be read in full to appreciate just how bad the NYT reporting was, part of which reads as follows:

The story hammers away at the idea that “the No.1 purchases by SNAP households are soft drinks, which account for about 10 percent of the dollars they spend on food.” Milk is No. 1 among non-SNAP households, we’re told, not soft drinks. At the start of the article, [NYT reporter Anahad] O’Connor frames these and other alleged facts with a quote that tells readers what SNAP really is: “SNAP is a multibillion-dollar taxpayer subsidy of the soda industry.” The story doubles down on this misleading image of the program by ending with a discussion of how the big soda companies lobby to keep the SNAP funds flowing — and with a quote asserting, “This is the first time we’ve had confirmation that this massive taxpayer program is promoting all the wrong kinds of foods.”

I want to be clear here: This is bullshit. It’s a political hack job on a program that helps millions of Americans feed themselves, and we should all be outraged that the NYT has disguised it as a piece of factual news reporting on its front page …

But what does the USDA report actually say? … Spoiler Alert: The report does not say that SNAP changes what people buy at the grocery–and that includes encouraging them to buy soda–and the report’s findings differ considerably from the portrayal Anahad O’Connor presents in the NYT … Here are the top three items in the report’s own summary of its major findings, reported in an attention-grabbing, color-shaded box:

1. There were no major differences in the expenditure patterns of SNAP and non-SNAP households, no matter how the data were categorized. Similar to most American households: ...

Later, the report adds these bullet points to its summary, in a separate “pay attention” box:

4. Overall, there were few differences between SNAP and non-SNAP household expenditures by USDA Food Pattern categories. Expenditure shares for each of the USDA Food Patter categories (dairy, fruits, grains, oils, protein foods, solid fats and added sugars (SoFAS), and vegetables) varied by no more than 3 cents per dollar when comparing SNAP and non-SNAP households.

...Most of the other comments I read regarding the NYT article were to the effect of: “Who is the NYT to tell poor people what they can and cannot spend their money on?,” as though one being poor necessarily implies that one is morally inferior, and so one needs to get told by Wealthy, Educated White Liberals (WEWLs) what one can and cannot buy. ...

I also find paternalism appalling,* no matter which side it comes from. It is especially appalling when said paternalism strongly hints at the idea that the poor are somehow morally deficient. The left gets up in arms when the right talks about mandatory drug tests for welfare recipients; this is no different. ...

And here is another thing about that NYT article: There are many, many agricultural economists who have done high-quality work on SNAP that steers clear from cheap advocacy. In no particular order: Parke Wilde at Tufts; Shelly Ver Ploeg at USDA’s Economic Research Service; my grad-school colleague Chad Meyerhoefer at Lehigh; Minnesota alum Travis Smith, now at UGA; my erstwhile colleague Tim Beatty; Craig Gundersen at Illinois; and so on, and so forth.

Were any of them interviewed in the article? Of course not. I mean, why would you talk to anyone over in icky flyover country? Why would you slum it at state schools? Instead, the reporter chose to go full TED Talk on the reader, remain comfortably ensconced in area code 212, and go with… Marion Nestle who, faisant flèche de tout bois, chose to use the report’s finding to attack her favorite bête noire: Big Bad Ag. Quoth Nestle:

“… SNAP is a multibillion-dollar taxpayer subsidy of the soda industry,” said Marion Nestle, a professor of nutrition, food studies and public health at New York University. “It’s pretty shocking.”

No. What is shocking is that an article which I would not have published when I was editor of my college’s newspaper not only gets published in but makes the front page of the New York Times, supposedly one of the last bastions of Real Journalism in this era of fake news and filter bubbles. ...

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