Growth predictions changed

I found a link on the Heavy Lifting site that took me to a yahoo site which had an article addressing the issue of retail sales going down and therefore causing the economists to lower their predictions for growth during the second quarter. This closely relates to the topic of discussion in which shift variables are causing the curves on the AS-AD method graph to shift. For example, these shifts affected the Treasury bond prices, which had initially increased and then decreased. One economist points his finger at the gas prices and the idea that the “bulk of tax refunds may have already been spent.” Does this mean consumers are not spending as much money? Should we be worried?


C-Dizzle said...

I don't have the initial impression that we really have anything to worry about. I know I've contributed to lower spending in the last year after I got married. I haven’t got much money to spend now. I probably contributed to three or four people’s worth of spending back in the day when I had mommy and daddy’s money but right now, I’m spending about ¼ of a person’s normal spending amount contributing to the lower retail sales. Ah…the life of poverty and being a student.

Also, for the economist that was pointing some of the blame of retail prices being down at the gas prices, I’m not sure I agree. In class we learned that considering inflation and all other pertinent factors, gas prices are relatively low. Sure, if the prices hadn’t have gone up we’d have more dough to spend but they simply kept up with trend of inflation.

Dr. Tufte said...

Lizzie is starting down the road to being a macroeconomist. Many of us spend a lot of time looking at announcements of new data trying to figure out what it means (see CurryBlog for example).

Three factors are typically important in figuring out what an announcement like this means. First, is there a simple one-time explanation for the movement in the variable? Second, is the variable in question a leading, coincident, or lagging indicator? And third, what is the typical or normal variation in that variable?

So, what do we have in this case? First, a big chunk of the decline (but not all of the decline) was in autos, which can be affected by seasonal sales and so on. Second, in the U.S. retail sales are not classified as leading, coincident, or lagging (indicating that they don't do any of those consistently), but they are often considered to be coincident in other countries (for example, Mexico). Third the 1.1% drop is very big - something more like 0.5% of under would be more normal. Also, keep in mind that this is an "advance" report - that's the first one, and they often end up being revised quite a bit (the announcement from the Department of Commerce actually says -1.1% plus or minus 0.8%, but you don't hear about that last part in the major media - unless it is good news they are trying to make look bad, LOL).

An additional idea to keep in mind is it isn't clear yet from the model we learn in class whether retail sales are a shift variable or not. Not everything is. The requirement is that they have to be causal in some sense. Retail sales are probably more of a result than a cause, so we'd probably be looking for some sort of variable that influences spending and could cause the aggregate demand to shift to the left (pulling retail sales down too). Offhand, I don't see anything right now that could have caused that, so I'm wondering if this is just a blip in the data.

As to C-Dizzle's comment, I think he is right about tax cuts and gas prices. That argument just seems to be either cynical or tongue in cheek.

Kid said...

While living in Indiana last year I kept running into people that were bashing President Bush because there apparently was a recession going on. I personally never felt that recession. It may have been that I lived on a fixed income. My spending didn’t go down, it stayed constant.
It’s not necessarily that people aren’t spending as much as they use to. It’s as C-Dizzle mentioned in a personal interview that some peoples spending to income ratio may not have changed, but their income was decreased so their spending decreased also.

Dr. Tufte said...

Two responses to Kid's comment.

First, the recession was over last year. It ended in the 4th quarter of 2001 (just after 9/11), and they are even considering moving that date back a little. But, it isn't unusual for people to believe a recession is ongoing long after it is over. There are two reasons for this. First, unemployment is a lagging indicator, so even after the economy is recovering, there are lots or people out of work. Second, people's perception of whether the economy is doing well or not is not tied to whether the growth rate of real GDP is negative (which is an important feature of most recessions), but rather is tied to whether the rate of growth of real GDP exceeds the rate of population growth (about 2% per year in the U.S.). The reason is that if we don't beat that 2% figure, the economy as a whole is growing, but we are spreading that growth more thinly. It is true that through 2002 and the first half of 2003 that we were having a lot of trouble beating that 2% threshold, so it is not unreasonable for people to still think we were in a recession.

As to Kid not feeling any effects of the recession, this is not unusual. Macroeconomic events are distributional in nature: they only make some people richer or poorer. So your Kid's experience in Indiana was typical - lots of people are not seriously affected by recessions. Unfortunately that means that whoever is affected is bearing the brunt of the costs. This is worse than it sounds. Situations like this are typical: a young person is laid off in their first recession, then may have less experience in their second recession and is more likely to get laid off again, and so on.

Anonymous said...

Kid: "... some peoples spending to income ratio may not have changed, but their income was decreased so their spending decreased also."

But that's exactly the point here! (Or perhaps rather a variation of it - constant income with a higher share deducted for non-retail spending (higher healthcare plan deductions + medical bills, anybody?), and less money being available for retail spending.) The key concept here is "discretioanry income".