Latest Data Show Weakening Contribution Of Net Exports To GDP Growth

Friday's data release from the Bureau of Economic Analysis shows US GDP growth slowing from a 3.5 percent annual rate in the third quarter to just 1.9 percent in Q4. One factor behind the slowdown deserves a closer look - the declining contribution of net exports to GDP growth. (The usual caveat applies to all the numbers reported in this post. This week's data are "advance" estimates, subject to revision. The average revision of GDP growth from advance to final estimate, without regard to sign, is a substantial 1.1 percentage points.)

The chart shows that the contribution of net exports to growth was positive during the middle years of the recovery, and had just begun to turn positive again after a dip in 2014 and 2015. Because the net export component of growth is volatile from quarter to quarter, I have drawn the chart to highlight the four-quarter moving average, with the actual quarterly data in the background. Whether we look at the quarterly data or the moving average, though, it is clear that the hopeful trend toward stronger net exports was reversed in the last quarter of 2016. . . .

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The Latest Data on Chinese Currency Manipulation Show a Market on the Edge of Instability

 China is a chronic currency manipulator, in the sense that, like the great majority of the world's countries, the People's Bank of China (PBoC) intervenes regularly in foreign exchange markets to influence the exchange rate of the yuan. The US dollar, in contrast, is one of the few currencies whose exchange rate floats freely in response to supply and demand. The fact that China actively intervenes in forex markets while the US does not is a chronic source of friction.   . . .

However, data on China's foreign currency reserves shows that for the past two and a half years, China has been acting as the ally, not the enemy, of those in the US who want to keep the yuan strong. Of course, it has not done this out of concern for American interests, but for its own.   . .

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Usual Weekly Earnings For 4th Quarter Show Little Sign Of Tighter Labor Market

How tight is the US labor market? The answer is important to the prospects for accelerated growth in employment and output in the year ahead. If the market is already tight, efforts to create more jobs are likely to push up wages rather than pull in new workers.

The unemployment rate, which fell below 5 percent in the fourth quarter, suggests that the market is already tight. The Federal Reserve estimates that "full employment" (or technically, the Nairu) means a measured unemployment rate of about 4.8 percent, a target already reached. However, data on usual weekly earnings of wage and salary workers, released Tuesday by the Bureau of Labor Statistics, suggests that there is still slack in the labor market.  . . . .

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Demographic Dividends Of The Past And Headwinds That Will Shape US Growth In The Trump Era

 One of Donald Trump's signature campaign promises is a 4 percent growth rate for real GDP. During his confirmation hearings, Treasury secretary designate Steven Mnuchin scaled that back to a 3 to 4 percent range, but that is still an ambitious goal. US GDP growth has not reached 4 percent in any year since the start of the century and has not averaged 4 percent over any four-year period since the 1970s.

The new administration is counting on changes in tax rates, trade policy, infrastructure investment, and the burden of federal regulation to reach its growth targets. Assessing the effects of those policies would be speculative at this point, as they exist only in outline. One thing we can be fairly sure about, though, is the demographic environment that the Trump administration faces. Let's look at some of the key demographic dividends that boosted growth in the past and at the headwinds the American economy will face over the next eight years.   .   .  .

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The Progressive Case for Abolishing the Corporate Income Tax

Reform of the corporate income tax is shaping up to be one of the big issues facing Congress in 2017. Republicans are pushing for big cuts in the corporate tax rate. Most observers seem to assume that conservatives and progressives will be at swords points over those cuts, but they should not be. There is a strong progressive case for sharply lowering the corporate income tax, or better still, abolishing it altogether.

On the Republican side, President Elect Donald Trump has proposed lowering the top corporate tax rate from its current 35 percent to 15 percent while eliminating most loopholes. House Republicans have proposed a 20 percent top rate, also eliminating some important deductions and preferences.

In the Senate, many Democrats, who retain the power to filibuster tax reform legislation, are digging in their heels against the corporate cuts. Progressive superstar Senator Elizabeth Warren of Massachusetts  is leading the fight. In a recent New York Times op-ed, she wrote, “Congress should increase the share of government revenue generated from taxes on big corporations—permanently.” She points out that in the 1950s, the corporate tax accounted for more than 30 percent of all federal revenue, compared to less than 10 percent today (see chart).

She is wrong. Progressives should stop trying to recreate the glory days of the corporate tax. Instead, they should join forces with conservatives to implement a comprehensive tax reform program that includes deep cuts in the corporate tax, or even its entire elimination. Here are three reasons why.

How To Interpret Differing Perspectives On Changes In The Price Level

The Bureau of Labor Statistics reported Thursday that the Consumer Price Index for all items rose by 2.1 percent in December from its level in the same month of the previous year. At the same time, the BLS and other agencies reported several other perspectives on rising US price levels. 

The change in the CPI is best understood as a change in the cost of living. As explained here, an increase in the cost of living measures the difficulty of maintaining one's standard of living, based on no change in income. The cost of living is the natural focus of individual consumers.

Other data attempt to measure the rate of inflation. Inflation means a change in the value of the unit of account, the US dollar, in this case. A pure increase in the unit of account would raise all wages and prices by the same amount, resulting in no change in the cost of living. Inflation is the natural focus of monetary policy.  . . .

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Divergent Unemployment Rates Highlight The Intractable Structural Problems Of The Eurozone

The latest data from the nineteen member countries of the Eurozone show an average unemployment rate of 9.9 percent. That is good news, insofar as unemployment is down from its 2013 peak of 12.1 percent. The bad news is not only how high EZ unemployment still is, but how much the rate varies among member countries.

More than fifty years ago, Robert Mundell, then an economist at the IMF, wrote a classic paper explaining when currency areas can work well and when they cannot. Among other things, he noted that an ideal currency area should have free flows of labor among members, flexible labor markets within each member, and similar exposure of members to economic shocks.

If Mundell's criteria were satisfied, unemployment rates would not vary significantly from one member of a currency union to another. . .

Unfortunately, as the chart shows, the Eurozone falls far short of the ideal. . . .

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