Estimates of Nominal and Real GDP in the U.S. for 2013-Q3

Oh no! The government isn't reporting any economic data!

That's something that might stymie a lesser economist, but we're not going to let a lame government shut down stop us!

That's why today, we're going to do the job that the furloughed employees of the Bureau of Economic Analysis won't be doing this month, unless the partial government shutdown ends really soon and they crank out a rush job. We're going to estimate what the United States' Gross Domestic Product will be for the just completed third quarter of 2013.

After all, we've previously found that it takes maybe as many as 2.5 economists in the private sector to do the same job that it takes 16 government economists to do, so just how hard could it be?

Technically, we're going to forecast it, but then, since it takes the BEA three attempts before they finally get close to a good number, forecast values for GDP are probably just as good as an official government estimated one.

Let's do this visually, so you can get a sense of where we came up with our estimate of GDP for 2013-Q3. Our first chart is one based on math that we have been developing to quantify and visualize the impact of changes in government spending, taxes and the Fed's quantitative easing programs upon the U.S. economy, but which we'll now use to project what nominal GDP will be reported to be for the third quarter of 2013:

Using 2012-Q3's GDP as our base point, our forecasting method has come within 0.02% of the actual figure for nominal GDP that was reported in 2012-Q4, 2013-Q1 and 2013-Q2, or rather, the three quarters preceding the third quarter of 2013. We are projecting a nominal GDP of $16,764.5 billion for the U.S. in 2013-Q3, with the following assumptions that apply since the end of 2012-Q3, which marks our base reference point:

• Net Change in total assets held by Federal Reserve (QE): $927.8 billion


• Net Change in government taxes: $168.9 billion


• Net Change in government spending since 2012-Q3: -$21.0 billion

The first two quantities are pretty locked in at this point and won't likely be subject to future adjustment. The wild card in our forecast is the amount of government spending in the U.S., which consists of spending at the federal government level, as well as at the state and local level, for which we won't likely have a good estimate until late December 2013. Assuming that the BEA's data jocks get back on the job before then.

To get around that limitation, we went over data recorded from 1960 through 2012 to determine that average change in spending for both Federal and State & Local governments from the second quarter of each year to the third quarter to determine our estimate for this year. And you want to know the crazy thing about that? Even though the BEA shut down the computer system that reports historic data as part of their effort to completely flummox lesser economists, we didn't need to use their stinking site to get the historic GDP data on government spending at all.

Speaking of which, that value isn't something that would be impacted at all by the partial U.S. federal government shut down, which didn't begin until 1 October 2013, which is part of the fourth quarter of 2013.

Another factor we need to consider from better, private sector sources of information about the relative health of the U.S. economy is the possible return of organic economic growth, following the year-long microrecession experienced by the private sector of the U.S. economy from July 2012 through July 2013, which may have added a positive contribution to the GDP number. Since those conditions would appear to have resumed somewhat in September 2013 however, we think that contribution will be small, with the actual value likely to be reported to be very close to our forecast nominal GDP number.

As for real GDP, our inertial forecasting methods aren't quite as precise as they would seem to be for nominal GDP. Here, outside of periods where the U.S. economy has turned the corner from expansion to contraction, or vice versa, historical back-testing puts us within 2% of the value the BEA reports about 95% of the time, and within 1% of it almost 75% of the time.

Our second chart shows our projected value for real GDP in 2013-Q3:

Here we anticipate that real, inflation-adjusted GDP in the U.S. will most likely fall in a range between $15,590.7 and $15,910.4 billion in terms of constant 2009 U.S. dollars, with a 95% probability of falling in a range between $15,430.9 and $16,070.2 billion.

By definition, it has a 50% probability of being above the midpoint of our forecast range, $15,709 billion. We think that given the relative increase in government spending from 2013-Q2 to 2013-Q3, combined with the positive contribution of organic economic growth, that real GDP in the third quarter of 2013 will indeed be reported to be above that level.

And there you have it - a simple blog just replaced the topline work of the Bureau of Economic Analysis for the third quarter of 2013 using just a handful of data points. We'd actually rather they be able to doing the job themselves, since the full extent of the data collection and reporting that they do is something that does have real world value, but we can't help but think that there ought to be a private sector alternative available to fully pick up the slack during times like these.

How Much Would a Federal Default Affect the U.S. Economy?

Since the single topic of the press conference that President Obama staged with his party's media collaborators on Tuesday, 8 October 2013 revolved around the topic of what could happen if the U.S. government chooses to default on its debt obligations, or as will more likely be the case, doesn't default on those obligations and instead doesn't spend as much as U.S. politicians would like it to spend, we thought we would go straight to the bottom line and find out how much the U.S. economy would be affected.

But first, we'll need some numbers, which CNBC tracked down for us:

Treasury Secretary Jack Lew is about to face the very same choices confronted by any financially struggling American household: Which bills to pay and when to pay them.

If Congress fails to raise the debt ceiling by around Oct. 17, Lew, who has been in the job less than a year, will have to sit at his desk and figure out how to make due on roughly one-third less in the way of government funds for the bills he has to pay. Because he can no longer borrow, according to the Bipartisan Policy Center, government spending will fall by about 32 percent, or $108 billion in the first month.

On a side note, to put that situation in context, this is no different from what could very well happen just 20 years from now when Social Security's trust fund has been fully depleted, as expected. At that time, the federal government will reduce all payments to Social Security beneficiaries by roughly 26%, unless it significantly increases the amount it borrows. And that's if everything goes as U.S. politicians have promised without any spending reform - this is one reason why the political fight over the debt ceiling and government spending levels is taking place now, because waiting will make needed reforms so much more painful. Not to mention, more necessary.

Back now to the question at hand: how much would a government spending cut of that magnitude affect GDP?

The good news is that we can answer that question with just back-of-the-envelope math! And we can do it on a "daily" basis.

That $108 billion reduction in federal government spending works out to be $3.6 billion per day. We know that the GDP multiplier for all government spending in the U.S. is 0.6, which we know from research published by the U.S. Federal Reserve applies when the nation's official unemployment rate is over 7.5%. Which is the case at present, thanks to the furloughing of federal government employees! If it were under 7.5%, we would need to use a GDP multiplier of 0.5 to account for the shock of a sudden change in government spending, as government spending is considered to deliver even less of an impact to GDP when the economy is in a healthier state.

Taking our potential government spending reduction of $3.6 billion per day, and multiplying it by our GDP multiplier for government spending of 0.6, we find that the U.S. economy will lose out the equivalent of $2.16 billion worth of GDP per each day that Uncle Sam doesn't have his credit limit reset to a higher level.

Now, to measure the impact upon GDP, just multiply that number by the number of days the U.S. federal government operates in that situation!

If played out through the remaining 78 days of 2013, assuming we stick with President Obama's planned schedule for putting the U.S. federal government into default, that would reduce the nation's GDP for the fourth quarter of 2013 by $168.48 billion.

To put that number into perspective, the fiscal drag produced by the $56.3 billion by which U.S. federal taxes will be higher in the fourth quarter of 2013 than they were in the fourth quarter of 2012 thanks to President Obama's tax hikes that took effect back in January 2013, GDP in the U.S. will be nearly $168.92 billion smaller in 2013-Q4 than it would otherwise have been given the GDP multiplier for taxes.

Why, that's almost exactly the same amount! Perhaps that explains why President Obama has been so intent on doubling down on his "no negotiation with the duly elected representatives of American citizens" strategy - he'll produce twice the negative fiscal drag on the U.S. economy in 2013-Q4 if only he and his supporters can stick with it!

And yes, numbers like those mean a recession, as the Federal Reserve's quantitative easing programs won't produce enough juice for the economy to offset that kind of fiscal drag, offsetting only somewhere between $250 billion and $290 billion of the hit if the debt ceiling isn't increased by 31 December 2013.

Of course, if the debt ceiling situation is resolved sooner than than, it is very much possible that the U.S. will have positive economic growth in 2013-Q4 - only seeing slower growth than it would have had instead. Which is pretty much the story for every quarter during President Obama's entire tenure in office.

How Much Will Furloughed Government Employees Reduce GDP?

How much will the furloughing of a reported 815,932 federal government employees, or 18.5% out of its estimated total of 4.4 million employees, which includes all military and postal service employees in addition to its civilian executive branch employees, reduce the United States' GDP?

Since most of the federal government's spending will be quickly caught up once the partial government shutdown ends, most of the negative impact to the nation's GDP will be felt through the loss of income that is not earned by the furloughed federal government employees. Consequently, we'll just focus on this aspect of the federal government shutdown.

Since the 815,932 furloughed employees are part of the 2,005,239 civilian members of the executive branch of the U.S. government, we'll use the average federal employee annual income of $74,436 for this portion of the federal government workforce to estimate the scope of the furlough upon the U.S. economy.

Readers should note that the average income of federal government employees is over 24% greater than the average income of $59,804 that is earned by Americans who work all-year-round in full-time jobs, and does not include the $40,000 worth of benefits that the average federal government employee also receives in compensation. We will not consider the value of these benefits in this analysis because the furlough is unlikely to last long enough for the furloughed federal employees to lose any of these benefits.

On a side note, if you'd like to see what your percentile ranking would be among the civilian employees of the federal government's executive branch, we have an app for that!

Since the impact will be measured by the number of days that these federal government employees are furloughed, we'll need to determine just how much each earns on average per work day. Since federal government employees are paid for not working on federal holidays, which is one of their benefits, we will not include federal holidays in our calculation, which means that we are assuming that federal employees will work on just 251 days in 2013, which puts the average income earned per furloughed federal government employee per work day at $296.56.

From here, we've built a tool to do the relevant math to find out how much the nation's GDP might be reduced just from furloughing these 815,932 federal government employees. You're welcome to modify the input fields to consider your own hypothetical scenario - for our part, we've entered 21 days as the hypothetical work day duration of the furlough, which would correspond to the partial federal government shutdown lasting one calendar month (because most federal government employees work only five days per week).

As always, if you're reading this article on a site that republishes our RSS news feed, click here to access a working version of this tool!

Furloughed Federal Employee Information
Input Data	Values
Civilian Executive Branch Employees to be Furloughed [USD]
Average Annual Income of Civilian Executive Branch Employees
Number of Workdays per Year
Number of Workdays Federal Employees Will Be Furloughed
Nominal U.S. Gross Domestic Product [billions USD]

Impact Upon GDP
Calculated Results	Values
Average Federal Employee Income per Workday
Total Income Not Earned by Furloughed Federal Employees
Percentage of U.S. GDP for Total Income Not Earned

For the default values in our tool, we find that the United States' nominal GDP would be reduced by 0.030% if the furlough of these 815,239 federal government employees extends for as long as 21 work days, which would fully cover the entire first calendar month in which the federal government might be partially shut down.

That would be a worst-case scenario.

The first thing to keep in mind is that like the public school employees who aren't considered to be employed during their schools' spring breaks, federal government employees being furloughed for an extended period of time are likely to apply for and receive unemployment insurance benefits, which will not be affected by the federal government shutdown in states that were prepared for it, and which will partially offset the impact of any loss income for these individuals.

The amount of unemployment compensation they might receive will vary by where they are stationed, their annual income and also by how long they are furloughed. Since most federal government employees are stationed in Washington D.C., Maryland and Virginia, the maximum weekly benefit they might be paid in unemployment compensation is $405, $410 or $378 respectively, which is likely what most would receive since federal employees are in the top tier of all income earners in the U.S.

While they would likely file their initial unemployment insurance claim this week, they wouldn't receive any unemployment benefits unless and until they have not been working for seven calendar days. Assuming that the furlough extends at least that length of time, once they do begin receiving this compensation, the negative economic effect to the nation of their being furloughed would be reduced by roughly 25%.

So, instead of a negative impact of 0.030% on the nation's GDP, the U.S. economy would instead experience a negative impact of just 0.022% as the result of the furloughed federal government employees not earning any income. Of course, that also doesn't consider other welfare programs of which furloughed federal government employees might soon get to take advantage, such as the Supplemental Nutrition Assistance Program (a.k.a. "food stamps"), which also is not affected by the shutdown.

The answer then to the question we asked in the original title for this post is "yes, there will be a very small and negative effect on GDP", but with numbers like these, even if the partial U.S. government shutdown continues for an extended period of time, the negative effect will be almost indistinguishable from noise.

And we're afraid that the Federal Reserve's decision to not begin tapering its QE programs sooner, when many had expected it to trim the program by $10 billion per month, almost double the amount of income that furloughed federal employees would not earn in that time, means that the Fed has already effectively acted to neuter the negative effects of the partial federal government shutdown on the U.S. economy by keeping its QE programs going at the levels they are.

Elsewhere on the Interwebs

National park expert Warren Meyer weighs in on the single most negative aspect of the partial federal government shutdown, and also on one analyst's estimate of the impact to the national government if it lasts one month. Somebody at Moody Analytics needs to do a better job in putting their decimal points in the right places!...

Counterfactual QE

Today, we're presenting a story in a single picture: what would nominal GDP in the U.S. have turned out to be in the face of minor government spending cuts and major tax hikes in the absence of the Federal Reserve's quantitative easing programs of the past year?

The difference between the nominal GDP that was and the counterfactual of the nominal GDP that otherwise would have been is all due to the Fed's quantitative easing programs, as measured by the cumulative change in total assets held by the Federal Reserve since the end of 2012-Q3. How we measured the relative impact of government spending cuts and tax hikes is explained here and their applicability is explained here.

The Power of Quantitative Easing

Now that the BEA has released its massive revision of the United States' Gross Domestic Product, we're going to put our Keynesian-style GDP multiplier tool to the test. Will it still be able to accurately predict what a future quarter's nominal GDP will be for the current U.S. economy based only based only on a previous quarter's GDP and a handful of fiscal and monetary policy GDP input shocks? Or will it fold up like the cheap suits worn by Keynesian-style economists?

To do this analysis, we'll be projecting the future value for nominal GDP from the starting point of the fourth quarter of 2012. This is the final quarter preceding major changes in the U.S. government's policies for taxes and spending, which makes it an ideal zero point in time from which to consider the impact of these shocks to the economy. The table below presents the values we'll be using in this analysis.

Changes in Fiscal or Monetary Policy Drivers Since 2012-Q4
Fiscal or Monetary Policy Driver	Total Through 2013-Q1	Total Through 2013-Q2
Change in Expected Tax Collections	+$56.3 billion	+$112.6 billion
Change in Government Spending	-$26.6 billion	-$29.1 billion
Amount of Quantitative Easing	+$295.0 billion	+$572.0 billion

Now it's time to do the math! We've entered the data that applies through the first quarter of 2013 into the tool below, which you'll need to change to the values that apply for 2013-Q2 to project the value of GDP for that quarter.

But before you go any farther, if you're reading this article on a site that republishes our RSS news feed, please click here to access a working version of this tool at our site, where it will also be properly formatted (we're looking at you, feedly - we speak CSS, you should too!...)

GDP and "Input Shocks"
Input Data	Values
Nominal GDP for the Previous Period [billions]
Change in Expected Federal Government Tax Collections [billions]
Change in Federal, State & Local Government Spending [billions]
Federal Reserve Net Quantitative Easing [billions]
Fiscal Policy Multipliers (Estimated Range)
Government Spending (0.6-0.7)*
Government Taxes (-3.0)
Quantitative Easing (0.8-1.0)

* If unemployment rate ≥ 7.5%. Multiplier is 0.5 if unemployment rate < 7.5% (may apply after 2013-Q2).

Individual Effects of Fiscal and Monetary Policies Upon GDP
Calculated Results	Values
Effect of Change in Government Spending on GDP [billions]
Effect of Change in Government Taxes on GDP [billions]
Effect of Change in Monetary Policy on GDP [billions]
Combined Effects of Fiscal and Monetary Policies Upon GDP
Combined Effects on GDP [billions]
Estimated GDP for Next Period [billions]

What we find is that with the data for 2013-Q1, for the Keynesian-style GDP multipliers that apply for fiscal and monetary policy, our tool would predict that nominal GDP would be $16,530.4 billion. That compares with the $16,535.3 billion actually recorded by the BEA for the nation's GDP in the first quarter of 2013, which means that our tool would appear to have underpredicted GDP in 2013-Q1 by $4.9 billion, an error of 0.03%.

After substituting in the data for 2013-Q2, with the exact same GDP multipliers, our tool predicts that nominal GDP would be $16,637.0 billion. The BEA's first estimate of GDP for the second quarter of 2013 is actually $16,633.4 billion, as our tool appears to have overpredicted GDP in 2013-Q2 by $4.4 billion, also an error that rounds to 0.03%.

The BEA will not finalize its estimate of GDP for 2013-Q2 until September 2013, so the actual difference between our tool's projection and the official figure will be subject to change until then. Regardless, from the data we do have, it appears that our tool can predict future nominal GDP levels for the current economy with a surprising degree of accuracy.

Update 14 September 2013: It occurs to us that a picture might be worth 1000 words here. Here's a chart illustrating how the puzzle pieces fit together, based upon the BEA's second estimate of GDP for 2013-Q2 (the third estimate will come out near the end of September 2013):

It is pretty clear from these results that if not for the Fed's quantitative easing programs, the U.S. economy would have contracted in recession during these quarters. You can consider the impact to what the U.S.' GDP would be by zeroing out this value in our tool above.

These results also demonstrate that monetary policy can remain highly effective even if basic interest rates are at or near the zero level. We'll discuss the mechanisms by which we think the Fed's quantitative easing programs affect the nation's economy in an upcoming post.

In the meantime, you can take advantage of our tool to get a sense of the extent to which the federal government's tax hikes and spending cuts in 2013 are actually affecting the nation's GDP by alternately zeroing out these figures. One thing that you'll find is that over 90% of the negative drag on GDP may be attributed to the tax hikes that took effect in 2013. Less than 10% may be attributed to reductions in government spending at all levels in the U.S.

Finally, if you really want to play the "what if" game, try combining government spending cuts with modest tax cuts in our tool above. One may wonder why today's politicians aren't discussing implementing this particular combination of fiscal policies.

About the Numbers in the Tool

GDP and Government Spending: The GDP ($16,420.3 billion) for our starting quarter (2012-Q4) was taken from the BEA's massive revision of GDP from 1929 through the first quarter of 2013, as were the numbers we've indicated for the total change in government spending from that starting quarter (-$26.6 billion for 2013-Q1 and -$29.1 billion for 2013-Q2). Most of the reduction in government spending occurred at the federal government level, with the balance being recorded for state and local governments.

We should also note that total government spending appears to have only fallen by $2.5 billion from 2013-Q1 to 2013-Q2 in the BEA's initial estimate for the more recent quarter, all of which occurred at the federal government level. We anticipate that this number will change as the BEA updates its estimate of government spending for 2013-Q2.

2013's Tax Hikes

The total for the change in the amount of taxes in the U.S. is based on the fiscal cliff tax deal of 3 January 2013, which increased the Social Security payroll tax by 2%, as well as increased the tax rates paid by high income earners and also the tax rates for investments.

Social Security Payroll Tax Hike: Here, we estimated the additional amount that President Obama expects to collect through Social Security's combined employer-employee payroll tax of 12.4% in 2013 (as indicated by Table 2.4 of President Obama's FY2014 budget proposal) compared to what would have been collected under 2012's combined tax rate of 10.4%, arriving at a figure of $108.6 billion for the year, for which we assumed that one-fourth ($27.16 billion) would be collected in the first quarter of 2013.

Obamacare Taxes: We also took into account the tax increases that went into effect on investment income and upon high income earners as part of the Patient Protection and Affordable Care Act, which are expected to total $36 billion in 2013, one-fourth ($9 billion) of which we assumed was incurred in the first quarter.

Fiscal Cliff Income and Investment Tax Hikes: The remaining portion of tax increases taking effect were a direct outcome of the increases in the top income tax rates and upon investment income mandated as part of the fiscal cliff tax deal at the beginning of 2013, where a static analysis indicates that the $80.6 billion more in taxes will be collected in 2013, one-fourth ($20.15 billion) of which might be applied to the first quarter of the year.

Combined, these values total up to a tax bill for Americans that's $225.2 billion higher for Americans in 2013 than in 2012, which works out to be approximately $56.3 billion higher for just 2013-Q1. To come up with the cumulative total of expected changes in tax collections from 2012-Q4 through 2013-Q2, we simply multiplied this quarterly change by a factor of 2.

About the Multipliers

We featured a discussion of the fiscal multipliers for government spending and tax policies in our previous discussion of Spain's disastrous economic choices of 2012. At present, we're simply assuming that the fiscal multiplier for the Fed's quantitative easing programs is 1.0, in the absence of data that might contradict that figure. As yet, there really isn't any data to contradict this estimate.

Quantitative Easing

Our estimates of the cumulative amount of quantitative easing being provided by the Federal Reserve through the first and second quarters of 2013 were determined by finding the change in the total assets held by the Fed with respect to their holdings at the end of 2012. That worked out to be $295.0 billion through 2013-Q1 and $572.0 billion through 2013-Q2.

Data Sources

Board of Governors of the Federal Reserve System. All Federal Reserve Banks - Total Assets, Eliminations from Consolidation. [Text Document]. Accessed 11 August 2013.

Cloyne, James. What Are the Effects of Tax Changes in the United Kingdom? New Evidence from a Narrative Evaluation. [PDF Document]. CESIFO Working Paper No. 3433. April 2011.

Owyang, Michael T., Ramey, Valerie A. and Zubairy, Sarah. Are Government Spending Multipliers Greater During Periods of Slack? Evidence from 20th Century Historical Data. [PDF Document]. Federal Reserve Bank of St. Louis. Economic Research Division. Working Paper 2013-004A. January 2013.

Romer, Christina D. and Romer, David H. The Macroeconomic Effects of Tax Changes: Estimates Based on a New Measure of Fiscal Shocks. [PDF Document]. March 2007.

U.S. Bureau of Economic Analysis. National Income and Product Accounts, Gross Domestic Product: Second Quarter 2013 (Advance Estimate), Comprehensive Revision: 1929 through First Quarter 2013. [Text Document]. 31 July 2013.

Visualizing the GDP Revision

How did the overall level of reported GDP change as a result of the BEA's finally including research and development (R&D) and also arts and entertainment (A&E) production as part of U.S. GDP?

Here, both R&D and A&E are now being accounted for by the BEA as fixed assets rather than as intermediate components of producing goods and services, which effectively boosts the reported level of GDP.

To find out, we first converted the pre-revision data from being in terms of inflation-adjusted, chained 2005 U.S. dollars to be in terms of inflation-adjusted, chained 2009 U.S. dollars, which we've presented as the green line in our chart below. We next charted the newly revised real GDP figures being reported by the BEA as the black line, then drew lines between the various quarterly data points to help visualize how much the data changed from the previous revision.

In this chart, which presents all of the BEA's quarterly data for GDP from the first quarter of 1947 through the first quarter of 2013, we find that R&D and A&E production had very little impact on GDP up until 1983, when it finally reached a share of 1% of real GDP. Ten years later, that share of GDP had doubled, and through the first quarter of 2013, has now reached a share of 3.5% of the real U.S. economy.

Our next chart focuses on the data since the first quarter of 2000.

The main news for this period is that with the revision, the 2007 recession was not as deep as previous data indicated, and the recovery was somewhat stronger.

But perhaps the most surprising revision in the data applies for the first quarter of 2011, when GDP appears to have contracted, as the data had previously indicated slightly positive growth. White House economist Alan Krueger blamed the economic shrinkage on the disruption to world supply chains stemming from the Japanese tsunami.

That particular event occurred on 11 March 2013, just 19 days before the end of the first quarter of 2011. In reality though, most of that effect wouldn't show up in the U.S. economy until the second quarter of 2011, since the transit times between the U.S. and Japan for cargo are such that any trade between the two that would be recorded in the economic statistics for the first quarter in 2011 would already have been en route at the time of the tsunami and would only need to be re-routed to non-damaged port facilities in Japan, an observation that is backed by trade data recorded for both March and April in 2011. Meanwhile, plants shut down in Japan as a result of the event would not affect production at U.S. facilities for several weeks following the event, and many U.S. facilities of affected Japanese companies, which would be the most likely to be impacted, continued production without any stoppages.

Since most of the adjustment related to the BEA's data revision affects GDP data since 1980, we thought it might be fun to present large-scale versions of our GDP temperature gauge charts. The first of these charts shows the one-quarter real annualized GDP growth rate for each quarter from 1980-Q1 through the first estimate of the GDP growth rate for 2013-Q2:

Our next chart presents the annualized two-quarter real GDP growth rate for each quarter from 1980-Q1 through 2013-Q2. Since this data is much less subject to volatility, we use it for forecasting, as it provides a more accurate picture of the pace of economic growth in the United States over time:

These charts provide an indication of how strong the U.S. economic growth rate is, which can range from a "hot" red (growing at a rate greater than 5.5%) to a recessionary "cold" purple (growing at a rate less than 1.5%).

The GDP Multiplier for QE

After adding an update to our original post for predicting GDP for the U.S. in the first quarter of 2013 that was based on earlier estimates of the amounts of government spending, tax hikes and quantitative easing taking place in the quarter, we thought the results based upon more final estimates of these quantities deserved a post in their own right.

Here are the values that need to be entered into the tool below to coincide with the actual levels of government spending cuts, expected tax increases and the Fed's quantitative easing that took place in the first quarter of 2013, per the BEA's third estimate for GDP for the quarter and the change in the Fed's total asset holdings over the quarter (as measured by the change in the Fed's total assets from 26 December 2012 to 27 March 2013) and our earlier estimate of the expected increase in tax collections for the quarter:

• Government Spending Cuts (Federal, State, Local): -$24.2 billion


• Expected Tax Collections from Tax Hikes: +$56.3 billion


• Total Federal Reserve Quantitative Easing: +$295.0 billion

We've updated our tool in this post with these values:

GDP and "Input Shocks"
Input Data	Values
Nominal GDP for the Previous Period [billions]
Change in Expected Federal Government Tax Collections [billions]
Change in Federal, State & Local Government Spending [billions]
Federal Reserve Net Quantitative Easing [billions]
Fiscal Policy Multipliers (Estimated Range)
Government Spending (0.6-0.7)*
Government Taxes (-3.0)
Quantitative Easing (0.8-1.0)

* If unemployment rate ≥ 7.5%. Multiplier is 0.5 if unemployment rate < 7.5%.

Individual Effects of Fiscal and Monetary Policies Upon GDP
Calculated Results	Values
Effect of Change in Government Spending on GDP [billions]
Effect of Change in Government Taxes on GDP [billions]
Effect of Change in Monetary Policy on GDP [billions]
Combined Effects of Fiscal and Monetary Policies Upon GDP
Combined Effects on GDP [billions]
Estimated GDP for Next Period [billions]

If you're reading this article on a site that republishes our RSS news feed, click here to access a working version of this tool!

You shouldn't be surprised to find that we come very close to the BEA's third estimate for GDP in 2013-Q1 of $15,984.1 billion in the tool above with these values, as our tool's results are nearly within 0.05% of it. If the amount of the Fed's quantitative easing in 2013-Q1 totaled up to $303.4 billion, our estimated GDP multiplier of 1.0 for QE would be dead on target.

What that means is that there isn't much of a multiplier effect for the economy from quantitative easing - it basically boosts the economy by $1 for every $1 worth of quantitative easing the Fed does. It does however make a positive contribution to GDP and it can clearly offset the impact of expected fiscal policy shocks.

In fact, as our tool demonstrates, if not for the effect of the Fed's amped up QE program in the first quarter of 2013, we would be discussing the United States' new recession instead.

Image Credit: North Dakota (ND.gov) Youth

On the Mark with 2013-1Q GDP!

Nearly three months ago, just after the BEA released its third estimate of GDP for the fourth quarter of 2012, we gave the following odds in forecasting where GDP in the first quarter of 2013 would be recorded:

Using our modified-limo forecasting method, we would anticipate that real GDP in 2013-Q1 has the following odds of falling in the indicated ranges (all values are given in terms of constant 2005 U.S. dollars):

• A 68% likelihood of falling between $13,581.8 billion and $13,867.2 billion.


• A 95% likelihood of falling between $13,439.1 billion and $14,009.9 billion.


• A 99% likelihood of falling between $13,296.4 billion and $14,152.5 billion.

The midpoint of our target ranges is $13,724.5 billion. We note for reference that this would correspond to an annualized real growth rate of 1.7%. [We forecast GDP - not GDP growth rates, which are very susceptible to big swings with just small changes in actual GDP.]

We did one other thing as well in our forecast - we took the over, which means that we expected that GDP would be recorded to be above our midpoint value of $13,724.5 billion.

So how did we do?

Would you believe that we just about completely nailed it?

The BEA reports that real GDP in 2013-Q1 came in at $13,725.7 billion, just 0.01% above the midpoint of our forecast range!

Not too shabby, especially because all we did was assume that GDP would grow at the same rate it averaged over the two preceding quarters!

Speaking of which, in now looking forward to where GDP will be recorded in 2013-Q2, well, we'll present our visual results, but we're not going to discuss them in detail, because they'll all be different by the time the data is actually reported!

The reason why is because the BEA is on the verge of a major revision for current and historic data, which will be released on 31 July 2013. That revision will re-base all the seasonally-and-inflation-adjusted values of real GDP to be in terms of constant 2009 U.S. dollars, instead of the 2005 U.S. dollars that the BEA has been reporting over the last several years. (Our chart above shows the data in terms of constant 2005 U.S. dollars).

So we're going to hold off on officially forecasting where real GDP in 2013-Q2 will end up until we have the BEA's revised numbers. Because we'll have enough work later dealing with all the changes that will be part of the BEA's upcoming data revision!

Wrecking the Greek Economy

Today, we're going to demonstrate how the demands of the International Monetary Fund (IMF), the European Commission (EC) and the European Central Bank (ECB) combined together into a troika to wreck the economy of Greece in 2010.

Specifically, we're going to show how the austerity measures they demanded and obtained as a condition of their bailout of the Greek government directly sent Greece's economy into a tailspin.

Let's set the stage. Here is the Guardian's timeline of the major events leading up to the bailout in mid-2010 as they were known at that time. It's definitely worth reviewing to get a sense of the crisis that led to such incredibly poor decisions.

Let's focus now on those austerity measures demanded by the Troika as a requirement to bail out the Greek government from its fiscal crisis. In July 2010, Greece's government reported what that would entail in terms of permanent spending cuts and permanent revenue increases.

Specifically, Greek Prime Minister George Papandreou's government committed to cut €6.915 billion [$9.187 billion U.S. dollars] in the government's planned spending for 2010, while also seeming to commit to permanently increasing the nation's tax collections by €9.950 billion [$13.218 billion USD] in that year.

We say "seeming" because a number of measures mentioned in the report were not enacted, while other amounts were reported as full-year values, where in reality, they were applied for just a fraction of the year. After subtracting the values for the non-enacted measures from the total and adjusting for the actual partial-year data, we find that the Greek government actually increased its intended tax collections in 2010 by €5.971 billion [$7.932 billion USD].

We're going to use those numbers in our tool below, along with the GDP value recorded by the World Bank for Greece in 2009, and also our standard GDP multipliers for government spending cuts and tax increases to see just how close we can get to what actually happened with Greece's GDP in 2010 (we'll also zero out the quantitative easing option, since that's not a consideration in this case). All values are presented in terms of U.S. dollars:

GDP and "Input Shocks"
Input Data	Values
Nominal GDP for the Previous Period [billions]
Change in Expected Federal Government Tax Collections [billions]
Change in Federal, State & Local Government Spending [billions]
European Central Bank Net Quantitative Easing [billions]
Fiscal Policy Multipliers (Estimated Range)
Government Spending (0.6-0.7)*
Government Taxes (-3.0)
Quantitative Easing (0.8-1.0)

* If unemployment rate ≥ 7.5%. Multiplier is 0.5 if unemployment rate < 7.5%.

Individual Effects of Fiscal and Monetary Policies Upon GDP
Calculated Results	Values
Effect of Change in Government Spending on GDP [billions]
Effect of Change in Government Taxes on GDP [billions]
Effect of Change in Monetary Policy on GDP [billions]
Combined Effects of Fiscal and Monetary Policies Upon GDP
Combined Effects on GDP [billions]
Estimated GDP for Next Period [billions]

If you're reading this article on a site that republishes our RSS news feed, click here to access a working version of this tool!

What we find is that virtually all of the decline in Greece's GDP is attributable to the spending cuts and tax hikes demanded by the Troika and enacted by the Greek government, as Greece's GDP fell from $321.016 billion USD [€241.638 billion] in 2009 to $292.305 billion USD [€220.025 billion] in 2010, as our tool is off by just 0.2% from that figure. Of these, the government's spending cuts contributed just 19% of the decline in Greece's GDP, while its tax hikes contributed the remaining 81% of the GDP decline from 2009 to 2010.

The collapse of Greece's GDP was such that the nation was unable to meaningfully close its budget gap, which ensured that the nation's fiscal troubles would be a prolonged experience.

What this chart tells us is that the Greek government only collected about as much revenue in 2010 as it would have without any tax hikes given the size of its GDP for the year. What our math earlier in this post demonstrates is that its GDP would have been much higher if not for its tax increases. (Go ahead! Try it in our tool above!)

On a side note, see if you can tell from our chart above when the next time was that the Greek government implemented additional tax hikes....

Barry Eichengreen describes what might have been for Greece:

The critical policy mistakes were those committed at the outset of the crisis. It was already clear in the first half of 2010, when Greece lost access to financial markets, that the public debt was unsustainable. The country’s sovereign debt should have been restructured without delay.

Had Greece quickly written down its debt burden by two-thirds, it would have been able to shed its crushing debt overhang. It could have used a portion of the interest savings to recapitalize the banks. It could have cut taxes, rather than raising them. It could have jump-started investment and gotten its economy moving again, if not in a matter of months, then, with luck, in no more than a year.

In its official post-mortem on the crisis, the International Monetary Fund now agrees that debt restructuring should have been undertaken earlier. But this was not its view at the time. Under the leadership of Dominique Strauss-Kahn, the Fund was in thrall to the French and German governments, which adamantly opposed debt relief.

Without the benefit of any beneficial monetary policy to offset the disastrous effects of the "balanced approach" demanded by the Troika for its fiscal policies, the wrecking of Greece's economy was ensured.

There are many lessons to be learned here. So far, it only appears that the IMF alone among all the leaders of the world's nations has learned any of them. But then, they still don't appear to have learned the most important lesson that taxes should not be hiked during a recession.

Would it be too much to ask for a fresh slate of more competent leadership all around the world?

References

Hellenic Republic Ministry of Finance. The Economic Adjustment Programme for Greece. [PDF Document]. July 2010.

World Bank. Data: GDP (Current US$). [Online Database]. Accessed 11 June 2013.

X-Rates. Exchange Rage Average (US Dollar, Euro) - 2010. [Online Database]. Accessed 11 June 2013.

Owyang, Michael T., Ramey, Valerie A. and Zubairy, Sarah. Are Government Spending Multipliers Greater During Periods of Slack? Evidence from 20th Century Historical Data. [PDF Document]. Federal Reserve Bank of St. Louis. Economic Research Division. Working Paper 2013-004A. January 2013.

Romer, Christina D. and Romer, David H. The Macroeconomic Effects of Tax Changes: Estimates Based on a New Measure of Fiscal Shocks. [PDF Document]. March 2007.

The Drag of Fiscal Policy on the U.S. Economy

Brian Lucking and Daniel Wilson of the Federal Reserve Bank of San Francisco have made news with their 3 June 2013 Economic Letter, in which they point the finger at a new source of drag on the U.S. economy: the U.S. federal government's fiscal policies, and President Obama's tax hikes in particular (emphasis ours):

While our estimates show that fiscal policy has held back the recovery slightly to date, the effect over the next three years looks much bigger. The CBO projects that the federal deficit as a share of GDP will drop 1.4 percentage points per year over the next three years. This projection would ease slightly to 1.2 percentage points per year if sequestration spending cuts were reversed. By contrast, our calculation of the historical-norm deficit decline through 2015 is 0.4 percentage point per year based on the CBO’s output gap projections. This implies that the excess drag from the rapidly shrinking deficit would reduce real GDP growth annually by between 0.8 and 1.0 percentage point, depending on whether sequestration is reversed. Thus, with or without sequestration, fiscal policy is expected to be a much greater drag on economic growth over the next three years than it has been so far.

Surprisingly, despite all the attention federal spending cuts and sequestration have received, our calculations suggest they are not the main contributors to this projected drag. The excess fiscal drag on the horizon comes almost entirely from rising taxes. Specifically, we calculate that nine-tenths of that projected 1 percentage point excess fiscal drag comes from tax revenue rising faster than normal as a share of the economy. As Panel B shows, at the end of 2012, taxes as a share of GDP were below both their historical norm in relation to the business cycle and their long-run average of about 18%. However, over the next three years, they are projected to rise much faster than our estimate of the usual cyclical pattern would indicate. The CBO points to several factors underlying this “super-cyclical” rise, including higher income tax rates for high-income households, the recent expiration of temporary Social Security payroll tax cuts, and new taxes associated with the Obama Administration’s health-care legislation.

The timing of this particular economic letter from the Fed is cool, because we just did the analysis of the impact of the spending cuts and tax increases upon the U.S. economy in the first quarter of 2013. In that analysis, we found that the Fed's recent adjustments to its quantitative easing programs were working to offset the negative effects of those fiscal policies, which would appear to be the only reason the U.S. economy grew in 2013-Q1.

But more importantly, we also quantified the impact of both the spending cuts and the tax increases upon the nation's GDP. Our tool below focuses just on those components and estimates their relative share of negative impact:

GDP and Fiscal Policy "Input Shocks"
Input Data	Values
Nominal GDP for the Previous Period [billions]
Change in Expected Federal Government Tax Collections [billions]
Change in Federal, State & Local Government Spending [billions]
Fiscal Policy Multipliers (Estimated Range)
Government Spending (0.6-0.7)*
Government Taxes (-3.0)

* If unemployment rate ≥ 7.5%. Multiplier is 0.5 if unemployment rate < 7.5%.

Effects of Changes in Fiscal Policies Upon GDP
Calculated Results	Values
Effect of Change in Government Spending on GDP [billions]
Effect of Change in Government Taxes on GDP [billions]
Combined Effects on GDP [billions]
Percentage Impact of Fiscal Policies Upon GDP
Percentage of Drag on GDP Due to Spending Cuts
Percentage of Drag on GDP Due to Tax Hikes

If you're reading this article on a site that republishes our RSS news feed, click here to access a working version of this tool!

Overall, for the first quarter of 2013, we find that the combination of government spending cuts and tax increases would reduce the United States' GDP by $184.5 billion from the previous quarter, which means the drag of the changes in the U.S.' fiscal policies upon the nation is roughly 1.2% of its GDP, which is close to what the Fed predicts with its model.

Of that fiscal drag on the United States' GDP, 8.5% may be attributed to the effect of government spending cuts at all levels in the U.S. - federal state and local. The remaining 91.5% of that decline is directly attributable to the tax hikes that went into effect in 2013, including the Social Security payroll tax hike, the various Obamacare tax hikes and President Obama's desired tax hikes upon high income earners and investments that were part of the fiscal cliff tax deal at the beginning of the year, all of which applied at the federal government level.

We therefore find that the actual results of the negative effects of the changes in U.S. federal government's fiscal policies are turning out to be pretty much right in line with what the Federal Reserve has predicted using its model.

Previously on Political Calculations

• Input Shocks, GDP, Multipliers and QE

Update 29 June 2013: Reduced the default value for government spending cuts in the tool above from -26.0 billion to -24.2 billion, per the BEA's third estimate of GDP for the first quarter of 2013. We calculate the overall reduction in GDP due to the fiscal drag from tax hikes (92%) and government spending cuts (8%) taking effect in the first quarter of 2013 is 1.1%, which closely agrees with the Fed's prediction.