What will the Fed Do? US GDP Growth Rises to 2.8 Percent in Q3 2013

Economics for your Classroom from Ed Dolan’s Econ Blog US GDP Growth Rises to 2.8 Percent in Q3 Posted November 7, 2013 Terms of Use: These slides are provided under Creative Commons License Attribution—Share Alike 3.0 . You are free to use these slides as a resource for your economics classes together with whatever textbook you are using. If you like the slides, you may also want to take a look at my textbook, Introduction to Economics, from BVT Publishing.

US GDP Growth Rises to 2.8 Percent Rate in Q3 2013  The advance estimate from the Bureau of Economic Analysis showed US GDP growing at a 2.8 percent annual rate in the third quarter of 2013.  If confirmed by later revisions, that would be the strongest growth since the first quarter of 2012 November 7, 2013 Ed Dolan’s Econ Blog

Phases of the Business Cycle  According to standard business cycle terminology, the recession phase of the business cycle is the downward movement of GDP from its previous peak  The recovery phase is the upward movement from the trough (low point) of the recession and continues until GDP again reaches its previous peak.  Once GDP moves above its previous peak, the expansion phase begins.  The latest data show that the expansion is continuing. Real GDP is now 5.3 percent above the previous peak November 7, 2013 Ed Dolan’s Econ Blog

Sources of Growth by Sector  Consumption contributed 1.04 percentage points to Q3 growth, a little below average for recent quarters  Investment contributed 1.45 percentage points. Fixed investment was a little weaker than in Q3 than in Q2, while inventories grew a little faster  Exports grew moderately and import growth slowed, so the contribution of net exports was positive  The government sector made a positive contribution to growth, due to more spending at the state and local level. Federal spending decreased. Contribution by sector to the 2.8% GDP growth in Q2 2013 Note: Imports are recorded in the national accounts with a negative sign, so the -0.30 percentage points shown here represent an increase in imports November 7, 2013 Ed Dolan’s Econ Blog

Export Growth Continues after a Pause  Exports played a leading role in GDP growth during the early part of the recovery  Beginning in Q2 2012, the growth of exports slowed  The data for Q2 and Q3 show renewed strength in the export sector, despite many remaining weaknesses in the global economy November 7, 2013 Ed Dolan’s Econ Blog

State and Local Spending Shows Signs of Life  Fiscal drag, or decreasing government spending, has been a negative influence on GDP growth for most of the past 3 years  In Q3, state and local government spending showed signs of life for the first time in several years  Federal spending continued to decrease as fiscal policy debates in Washington remain deadlocked November 7, 2013 Ed Dolan’s Econ Blog

Inflation Indicators Fall Sharply  In addition to data on GDP and its components, the national income accounts include a number of inflation indicators  The broadest is the GDP deflator, which reflects changes in the prices of all GDP components  Another is the deflator for personal consumption expenditure, an alternative to the more widely publicized consumer price index.  Both indicators showed inflation at 1.9% in Q3, below the Fed’s 2% target and roughly in line with recent trends November 7, 2013 Ed Dolan’s Econ Blog

What will the Fed Do?  Everyone will look in the GDP data for clues to whether the Fed will “taper” its program of QE3 monetary stimulus  By itself, faster GDP growth would strengthen the arguments of those who favor tapering  However, inflation remains below the Fed’s 2% target, a factor that favors continued stimulus  In the end, the Fed’s decision may depend on how much damage the fiscal policy deadlock in Washington does to GDP growth in Q4 and beyond November 7, 2013 Ed Dolan’s Econ Blog

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