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Home Publications Blogs Beat the Press Yet More Bipolar Economic Reporting from the Post

Yet More Bipolar Economic Reporting from the Post

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Tuesday, 28 May 2013 20:55

You get a one month jump in housing prices and suddenly the economy is booming. Okay, that's not quite fair, housing prices have been rising at a pretty rapid pace for a year now, but still does the Post really want to claim that the economy is "surprisingly robust?"

Let's remember where we stand. The economy grew at a 2.5 percent annual rate in the first quarter. Given the economy's trend rate of growth is between 2.2-2.5 percent, this means that we were at best making up lost ground at the rate of 0.3 percent annually. The Congressional Budget Office estimates that the economy is 6.0 percent below its potential. At the first quarter growth rate it will therefore take us at least twenty years to get back to potential GDP. 

But it gets worse. Much of the growth in the first quarter was due to a jump in inventories. Final demand grew at just a 1.5 percent annual rate. Investment in new equipment is only slightly above year ago levels. Non-residential construction has been falling in recent months.

The second quarter does not look a whole lot better. Retail sales fell 0.5 percent in March. They only made up 0.1 percentage point of this drop in April. The April job growth numbers were not bad, but because of a sharp drop in the length of the average workweek, there was a drop in index of total hours that equaled the largest in the recovery.

In addition to the run-up in house prices, the optimism rests on rising stock prices and a jump in the latest consumer confidence numbers. Not surprisingly, most of the rise in the consumer confidence index was due to the expectations component. This component is highly erratic and has little relationship to consumption. The current conditions index also rose, but not by anywhere near as much and not to levels higher than it has been in the past.

The article concludes with a word of caution:

"For the economy to continue growing even as the sequestration and tax increases have their full effects, higher housing prices will need to translate into more home construction, higher stock prices will need to translate into companies making new investments, and consumers’ higher level of confidence will need to translate into spending more money."

Actually, just about every part of this is wrong. Construction remains depressed because vacancy rates are still near record levels, albeit down somewhat from the peaks hit in 2009-2010. As long as there are so many vacant units that could be rented or sold, new construction will remain below normal levels.

Stock prices have very little relationship to investment. The investment share of GDP hit its post-war peak in the late 1970s when the ratio of stock prices to trend corporate earnings was at unusually low levels. The investment share fell sharply in the 1980s even as stock prices and PE ratios soared. The stock market actually has a much larger impact on consumption through the wealth effect than it does on investment, hence the late 1990s consumption boom.

Finally, consumption is actually quite high. The savings rate is under 4.0 percent, well below its post-war average. If anything we should be concerned that consumption is too high, meaning that baby boomers are not saving enough for retirement.

 

Comments (2)Add Comment
Cheerleading
written by Jennifer, May 28, 2013 10:53
Just the usual story, things are getting better but we need to wait and see until we can be sure. This is the essence behind almost every article about the "housing recovery" and the economy in general since 2010. The emphasis is on the positive-if you were to dwell on the negative this might be taken as a call to action-with just enough negative to "hedge your bet". At some point do the people writing this get tired?
Housing Bubble
written by JayR, May 28, 2013 11:43
Housing cannot go up 10% in a year unless something is very wrong. Google for housing bubble and you get articles from BBC News, Fortune, Time, Bloomberg and more. It escapes me we Dean Baker has not been more vocal about this.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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