South By North Strategies, Ltd.

Is the Recovery Package Working?

In a new analysis, economist Josh Bivens of the Economic Policy Institute looks at the newest GDP report and identifies the effects of the American Recovery and Reinvestment Act (ARRA). Concludes Bivens:

All in all, the combined evidence—the timing of ARRA in relation to subsequent economic performance; the strong influence of taxes and transfers since ARRA; and direct data from Recovery.gov on the timing and composition of ARRA expenditures and tax-cuts—suggests that the recovery package has substantially boosted economic growth and created or saved 1.1 to 1.5 million jobs since its passage.

More specifically, Bivens considers the timing of the recovery package, the impact of income transfers and tax reductions, and direct evidence of ARRA’s role in job creation. Writes Bivens:

… estimates indicate that the recovery package contributed 2.7 percentage points to annualized GDP growth in the third quarter and that it has cumulatively added a full 1.6% to GDP since it was passed. Given that hours have fallen 25% faster than employment since the recession began, if pre-recession levels of average hours worked are targeted, this should translate into a 1.3% (1.6*(1-.25)) increase in employment, or 1.5 million jobs. If one wants to be conservative and note that the last two recoveries following recessions have been accompanied by a 30% rise in the rate of productivity growth (which, all else equal means that less employment is required for a given rate of GDP growth), the 1.6% bump to GDP would translate into something closer to 1.1 million jobs (1.3*(1-.3)) created or saved by the recovery package.

Weekend Wonk Out

A round-up of policy reports from the week ending on 10/30:

• The Economic Policy Institute looks at declines in employer-sponsored health care.
• The Council of Economic Advisers gauges the impact of health reform on states and localities.
• The GAO considers how the broadband provisions of the recovery act are being implemented.
• The Center on Budget & Policy Priorities analyzes the first-time homebuyers tax credit.
• The Pew Charitable Trusts critiques Amtrak’s financial performance.

Service Activity in the South Atlantic: Oct.

From the Federal Reserve Bank of Richmond’s October survey of service-sector activity in the South Atlantic (District of Columbia, Maryland, North Carolina, South Carolina, Virginia and West Virginia):

Service sector activity slumped in October, according to the latest survey by the Federal Reserve Bank of Richmond. Retail sales dropped as shopper traffic diminished and big-ticket sales declined. Inventories also fell, although reductions were less pervasive than a month ago. Services firms’ revenues also contracted in October. Looking ahead, survey respondents scaled back their expectations for business opportunities in the next six months.

3rd Quarter GDP Growth

Advance estimates from the U.S. Bureau of Economic analysis show that real gross domestic produce (GDP) grew at a 3.5 percent annual rate between July and September 2009.  This is the first quarter of positive GDP growth since the second quarter of 2008.

Real GDP is driven by four broad factors: personal consumption expenditures (PCE), gross private domestic investment, net exports, and government spending in investment.

Last quarter,  PCE and gross private domestic investment were the main contributors to real GDP growth, adding 2.36 and 1.22 percentage points (annualized) respectively. Government spending, primarily at the federal level, added 0.62 percentage points. Because America imports more goods and services than it exports, the trade gap subtracted 0.53 percentage points from GDP growth.

Many observers will look at the positive GDP report — which is subject to two further revisions — and claim that the recession has ended. This is a misleading claim. Although positive GDP growth is welcome news, it is unclear if this path is sustainable, as so much of the growth is tied to public spending — both direct spending on things like military purchases and indirect spending through tax breaks.
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Around the Dial – Oct. 29

Economic policy reports, blog postings, and media stories of interest:

• The Charlotte Observer explains why Charleston, SC is a promising site for Boeing.
• The Financial Times’ Martin Wolf assesses the harm of bad economic thinking.
• Calculated Risk discusses misdirected housing policies.
• The New York Times looks at enrollment trends at two-year colleges.
• The Center for Economic and Policy Research analyzes the new GDP report.