I have previously wrote about living standards in Ireland, and how GDP per capita overstates typical incomes because of a lot of foreign investment.
This is not to say that foreign investment is bad — to the contrary! But standard income statistics, such as GDP, aren’t particularly useful for a country like Ireland.
Norway has a similar challenge with national income statistics, but a different reason: Oil. Norway has a very large supply of oil revenues relative to the size of the rest of its economy, and oil revenues are counted in GDP. But those oil revenues don’t necessarily translate into higher household income or consumption.
Using World Bank data, Norway appears to be very rich: GDP per capita in nominal terms was about $90,000 in 2021. Compare that with $70,000 in the US, which is a very rich country itself. Sounds extremely wealthy!
Of course, by that same statistic, average income in Ireland is $100,000. But after making all the proper adjustments, as we saw in my prior post, Ireland is right around the EU average in terms of what individuals and households actually consume.
Here’s the data, showing cumulative real GDP growth and cumulative core inflation since the right before the pandemic (please note that I flipped the x- and y-axis from the previous post — sorry for the confusion, but this way makes more sense).
The picture looks roughly the same, but here are a few notable changes:
Despite the slight slowdown in GDP growth in the first half of 2022, the US still clearly has the highest rate of economic growth
UK, Italy, and Canada have now moved into positive territory for cumulative economic growth (yes, it’s all inflation adjusted)
But Japan and Germany still have had no net economic growth during the pandemic — and even worse for Germany, they have had a healthy dose of inflation too
The US once again stands out as having both the best economic performance and the worst inflation performance in the G7. Are these two things connected? That’s a question that is unanswerable from a simple scatterplot, and may be unanswerable completely. But I think it’s fair to say that the US hasn’t taken an obviously inferior economic path relative to other countries, even if our path has been inferior compared to some ideal policy. But don’t commit the Nirvana Fallacy!
Finally, we should recognize that the GDP is not the only important measure of how an economic is performing. For example, the US labor market has not recovered as well as some other peer nations have. Still, GDP is one of the important broad measures to look at, even if it is not ideal for diagnosing recessions.
US GDP fell for the second straight quarter according to statistics released this week by the Bureau of Economic Analysis. This means that by one common definition we’re now in a recession, which has ignited a debate about whether “two consecutive quarters of negative GDP growth” is the best definition (as opposed to ‘when the NBER says there’s one’, like I generally teach and Jeremy argued for here, or something else).
Naturally this debate has political overtones, since the party in power would be blamed for a recession, so we’ve seen the White House CEA argue that we’re not in a recession, many on the other side argue that we are, and plentiful hypocrisy from people who should know better.
But in political terms, the fight over the binary “are we in a recession” call won’t be the big economic factor in November’s elections- that will be inflation and GDP, especially 3rd quarter GDP. One of the oldest and best predictors of US elections is the Fair Model, which uses inflation and the number of recent “strong growth quarters”. Fair’s update following the recent Q2 GDP announcement states:
the predicted vote share for the Democrats is 46.70, which compares to 48.99 in October. The smaller predicted vote share for the Democrats is due to two fewer strong growth quarters and slightly higher inflation
By Election Day we’ll have 3 more months of economic data making it clear whether inflation is getting under control and whether economic activity is picking back up or continuing to decline. Monthly data releases on inflation and unemployment will be closely watched, but the most discussed release will likely be third quarter GDP. It will summarize 3 months instead of just one, it will be of huge relevance to the debate over how severe the recession is or whether we’re even in one, and it will likely be released less than two weeks before election day. The NBER almost certainly won’t weigh in by then; they tend to take over a year to date recessions, not adjudicate debates in real time.
So when BEA does release their Q3 GDP estimate in late October, what will it say? Markets currently estimate at least a 75% chance it will be positive (they had estimated a 36% chance of positive Q2 GDP just before the latest announcement). That sounds high to me, the yield curve is still inverted and I bet investment will continue to drag, but forecasting exact GDP numbers is hard. Its a much easier bet that whatever the number turns out to be will loom large in political debates just before the elections. Perhaps we’ll get the Q3 GDP growth number that would make for the most chaotic debate: 0.0%.
The truth is, we don’t know. But let’s be clear: whether we are or not doesn’t depend on the 2nd quarter GDP report. Though two consecutive quarters of declining GDP is often cited as the definition of a recession, it’s not the definition economists use. And with good reason.
Instead, the NBER Business Cycle Dating Committee uses this definition: “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.” And they explain why GDP is not their preferred measure, which includes several reasons but this one seems most germane to our current moment: “[the] definition includes the phrase, ‘a significant decline in economic activity.’ Thus real GDP could decline by relatively small amounts in two consecutive quarters without warranting the determination that a peak had occurred.”
If not GDP, what do they look at? I’ll get into more detail later, but in short, they look at monthly measures of income, consumption, employment, sales, and production (a direct measure of production, which GDP is not — it’s a proxy).
However, the American public seems convinced that we are in a recession. The most recent poll I can find on this is from mid-June, which is useful because (as we’ll see below) we have most of the relevant measures of the economy for June 2022 already. In that poll, 56% of Americans say we are in a recession. And while there is some partisan bent to the responses, even 45% of Democrats seem to think we are in a recession. For those that say we are in a recession, 2/3 cite inflation as the primary indicator that we are in a recession.
Already here we can see the difference between the general public and NBER: the rate of inflation is not one of the measures that NBER considers when defining a recession. So, what are the measures they use?
Today, my chart looks at the G7 countries (representing roughly half of global wealth and GDP), showing both their economic performance (as measured by real GDP growth) and health performance (as measured by excess mortality through February 2022).
The US has clearly had the best economic performance. But the US also had the highest level of excess deaths per capita (not all of this is from COVID — US drug overdoses are also way up — but even using official COVID deaths, the US still tops this group).
Japan had the best health performance, in fact amazingly no cumulative excess deaths through February 2022 (this has risen very slightly since then, but I stopped in February so all countries had complete data). However, Japan also had slightly negative economic growth.
Which country ends up looking the best? Canada! Very low levels of excess deaths, and at least some positive economic growth. Not as much growth as the US, but Canada is the second best performer in the G7.
To give some context of just how low the level of deaths have been in Canada, first recognize that the US had 1.1 million excess deaths in the pandemic through February 2022. If instead our excess deaths had been roughly equal to Canada on a per capita basis, we would have only had 180,000 excess deaths in the US, saving over 900,000 lives.
Some of Canada’s COVID policy have been overly restrictive, such as the vaccine mandates that sparked protests in February 2022. But by then, Canada had already largely achieved it’s COVID victory over the US and most other G7 nations. Compare excess mortality in Canada with the US: the only big wave in Canada that came close to the US was the Spring 2020 wave. After that, Canada was always much lower.
Today two data releases for Gross Domestic Product were released. The first release was for the United States, giving us the third and “final” release for first quarter 2022 data. It was down 1.6% from the prior quarter (though we knew this two months ago — not much has changed since the “advance” estimate). That’s not good (but see this great Joseph Politano newsletter for some more detail).
The second release was the annual 2021 GDP data for the European Union. The release showed strong growth in 2021 (+5.4%), but that’s relative to the bad year of 2020. So compared to the pre-pandemic level of 2019, the EU was still about 0.8% below this more accurate baseline. Comparatively, the US was already 2% above 2019 with the annual 2021 release (everything in these two paragraphs is adjusted for inflation). Of course, within the EU, there is a lot of variation, but overall the US looks comparatively well.
Let’s break down that variation in the EU and include the first quarter of 2022 data to make the best comparison with the US. To bring in some more relevant comparison countries, I’ll use data from the OECD for a complete comparison. Note: I’ve excluded Ireland, because their GDP is weird. I’ve also excluded Turkey, because even though all the data here is adjusted for inflation, Turkey is in a highly inflationary environment, making the data a little difficult to interpret.
Here is the chart, which shows the change in real GDP from the 4th quarter of 2019 up through the 1st quarter of 2022 (I use the volume index, which is similar to adjusting for price inflation). I have highlighted in orange the largest economies in the OECD (anything with about $2 trillion of GDP or larger, with Spain and Canada at about that level).
During the week of thanksgiving in 2020, our thirteen-year-old microwave bit the dust. NBD, I thought. Microwaves are cheap, and I’m willing to spend a little more in order to get one that I think will be of better quality (GE, *cough*-*cough*). So, I filtered through the models on multiple websites and found the right size, brand, and wattage. No matter the retailer, at checkout I learned that regardless of price, I’d be waiting a good two months before my new, entirely standard, and unexceptional microwave oven would arrive. I’d have to wait until the end of January of 2021.
The aggregate supply & aggregate demand model (AS-AD) is nice because it’s flexible and clear. Often professors will teach it in levels. That is, they teach it with the level of output on one axis, and the price level on the other axis. This presentation is convenient for the equation of exchange, which can be arranged to reflect that aggregate demand (AD) is a hyperbola in (Y, P) space. Graphed below is the AD curve in 2019Q4 and in 2020Q2 using real GDP, NGDP, and the GDP price deflator.
The textbook that I use for Principles of Macroeconomics, instead places inflation (π) on the vertical axis while keeping the level of output on the horizontal axis. The authors motivate the downward slope by asserting that there is a policy reaction function for the Federal Reserve. When people observe high rates of inflation, state the authors, they know that the Fed will increase interest rates and reduce output. Personally, I find this reasoning to be inadequate because it makes a fundamental feature of the AS-AD model – downward sloping demand – contingent on policy context.
At the same time, I do think that it can be useful to put inflation on the vertical axis. Afterall, individuals are forward looking. We expect positive inflation because that’s what has happened previously, and we tend to be correct. So, I tell my students that “for our purposes”, placing inflation on the vertical axis is fine. I tell them that, when they take intermediate macro, they’ll want to express both axes as rates of change. I usually say this, and then go about my business of teaching principles.
But, what does it look like when we do graph in percent-change space?
Inflation is definitely here. The latest CPI release puts the annual inflation rate in the US at 8.5% over the past 12 months, the highest 12-month period since May 1981. That’s bad, especially because wages for many workers aren’t keeping up with the price increases (and that’s true in other countries too).
But what about other countries? Many countries are experiencing record inflation too. The same day the US announced the latest CPI data, Germany announced that they also had the highest annual inflation since 1981.
Using data from the OECD, we can make some comparisons across countries during the pandemic. I’ll use data through February 2022, which excludes the most recent (very high!) months for places like the US and Germany, but most countries haven’t released March 2022 data quite yet.
Let’s compare inflation rates and GDP growth (in real terms, also from the OECD), using the end of 2019 as a baseline. We’ll compare the US, the other G-7 countries, and several broad groups of countries (OECD, OECD European countries, and the Euro area). The chart below uses “core inflation,” which excludes food and energy (below I will use total inflation — the basic picture doesn’t change much).
The financial crisis recession that started in late 2007 was very different from the 2020 pandemic recession. Even now, 15 years later, we don’t all agree on the causes of the 2007 recession. Maybe it was due to the housing crisis, maybe due to the policy of allowing NGDP to fall, or maybe due to financial contagion. I watched Vernon Smith give a lecture in 2012 in which he explained that it was a housing crisis. Scott Sumner believes that a housing sectoral decline would have occurred, and that the economy-wide deep recession and subsequent slow recovery was caused by poor monetary policy.
Everyone agrees, however, that the 2007 recession was fundamentally different from the 2020 recession. The latter, many believe, reflected a supply shock or a technology shock. Performing social activities, including work, in close proximity to others became much less safe. As a result, we traded off productivity for safety.
The policy responses to each of the two were also different. In 2020, monetary policy was far more targeted in its interventions and the fiscal stimulus was much bigger. I’ll save the policy response differences for another post. In this post, I want to display a few graphs that broadly reflect the speed and magnitude of the recoveries. Because the recessions had different causes, I use broad measures that are applicable to both.