Council of Economic Advisers Blog

  • Statement on the Advance Estimate of GDP for the First Quarter of 2010

    Today’s GDP report shows important signs of continued recovery.  Real GDP grew at a solid 3.2 percent annual rate in the first quarter of 2010.  This is the third consecutive quarter of positive growth.  To put the rate of growth into perspective, real GDP fell at a 6.4 percent rate in the first quarter of 2009.  There is no question that the economy has improved dramatically over the past year.

    Each additional quarter of GDP growth is a welcome sign that the economy is healing from a severe recession that cost over eight million jobs and wiped out trillions of dollars in household and family wealth. Given the severity and depth of the recession, it will take a number of quarters of robust growth and strong employment gains to return the economy to full health and full employment.

    The most encouraging news in the report was the strong growth of key types of private spending by consumers.  Personal consumption expenditures grew at an annual rate of 3.6 percent, suggesting renewed confidence among households.  This growth is also consistent with the rise in tax refunds in the first quarter due to the Recovery Act (see the CEA’s Third Quarterly Report on the Economic Impact of the American Recovery and Reinvestment Act of 2009 for more information on the surge in Recovery Act tax relief in the first quarter).  Business investment spending on equipment and software rose strongly as well, increasing at a 13.4 percent rate.  Businesses also increased their inventory investment substantially, suggesting they are more optimistic about future sales.

    While there is much to be encouraged by in the report, there were two areas of notable weakness.  First, both residential and non-residential structures investment declined, reflecting continuing slack in the housing and commercial real estate markets.  Second, state and local government purchases fell at a 3.8 percent rate, more than offsetting a small rise in Federal purchases.  This fall in state and local government spending was the largest since 1981, and is consistent with the continuing severe budget shortfalls in many states.

    The Administration continues to work with Congress to take responsible actions that will help the private sector create jobs and speed the recovery.

    CEA 43010 GDP Chart

     

    Christina Romer is the Chair of the Council of Economic Advisers

  • Strengthening the Rural Economy

    Rural areas are home to about 50 million Americans and are an essential part of the overall economy.  As the President embarks on the next stops on the White House to Main Street Tour in Illinois, Iowa, and Missouri, the CEA today released a report that surveys the current state of rural America and describes the Obama Administration’s policies for strengthening the rural economy.  The map below shows the distribution of rural counties across the county.
     
    Among the report’s key findings are that rural America has a diverse economy. Rural residents are employed in a range of industries including manufacturing, services, government, and wholesale and retail trade.  Agriculture, which has traditionally been a key base of the rural economy, continues to record strong productivity gains and is highly competitive in international markets.  However, while rural America offers many opportunities, it also faces a number of challenges. Its educational attainment lags behind that of urban areas.  Improvements in health status also have not kept pace, and access to doctors and health services has been a key challenge in rural areas.
     
    The newly-released CEA report outlines four categories of Administration’s policies to lay a foundation for 21st-century growth that will continue to strengthen and diversify the rural economy, support rural workers and businesses, and put rural America on a path toward a more prosperous future.  Many of these policies are already being implemented through the American Recovery and Reinvestment Act of 2009.  But further work remains to ensure the prosperity and vitality of Main Streets across America.
     
    The first category of Administration policies for strengthening rural America is focused on growing businesses and expanding employment opportunities.  These policies include increased support for small business lending through Recovery Act funds to the Small Business Administration.  They also include incentives to greatly expand biofuel production and renewable energy generation, which are often centered in rural areas.  For instance, with the Renewable Fuels Standard just put into place, it is expected that over 100 ethanol plants will be built over the next decade, while incentives for renewable energy generation in the Recovery Act are expected to double wind generation.  There are also important new opportunities for rural tourism and recreation.
     
    A second category of policies is aimed at strengthening rural infrastructure.  Without roads, bridges, water projects, and telecommunications, rural America cannot get its products to market efficiently or be fully integrated with the rest of the economy. For this reason, the Federal government has traditionally supported rural infrastructure projects.  The Obama Administration has continued that support in important and innovative ways, such as by supporting the expansion of broadband internet access to rural areas and upgrading and improving the efficiency of existing rural water infrastructure.
     
    A third category of policies focuses on strengthening the agricultural sector.  As part of the National Export Initiative, the Administration has proposed measures to further open international markets to U.S. agricultural products.  It has also proposed reforms to better target farm support programs, and urged a greater focus on local and regional food systems through initiatives such as Know Your Farmer, Know Your Food.
     
    The fourth category of policies is aimed at strengthening the labor force and improving the quality of life in rural America by investing in education and health care.  For instance, the President’s proposed American Graduation Initiative, together with infrastructure investments in rural broadband, will help make high-quality online courses available, especially benefiting rural areas.  The Administration is also investing in the health of rural America by taking actions to increase the affordability and quality of health care, while bolstering the medical workforce and infrastructure to address the unique challenges rural residents face in accessing doctors and hospitals.  Health insurance reform through the Patient Protection and Affordable Care Act also provides special support for the rural medical workforce by expanding graduate medical education positions in rural teaching hospitals and by supporting training for doctors and nurses in rural health care.

    The history of rural America is one of proud accomplishment, and the President is committed to ensuring that the future of rural America is as distinguished as its past.

    CEA 42610 Figure 1

     

    Christina Romer is the Chair of the Council of Economic Advisers

    Ann Wolverton is Senior Economist at the Council of Economic Advisers who focuses on Energy, Environment and Natural Resources

  • Analysis of the Advance Report on Durable Goods Manufacturers’ Shipments, Inventories, and Orders for March 2010

    Manufacturers’ new orders for durable goods, which fell 1.3% in March, is the first item discussed in the Commerce Department’s press release, and is the item headlined by many news organizations.  But this orders series does not tell us much about the actual direction of the economy because it is extremely volatile.  A key source of this volatility of the overall orders series is its inclusion of orders of aircraft.  Aircraft orders are often made in bunches, while, in contrast, shipments of finished aircraft trickle out more smoothly following production lags of several years.  Excluding transportation equipment (the sector that includes aircraft), new orders increased 2.8%, well above market expectations of 0.7%.       

    Shipments of nondefense capital goods excluding aircraft increased 2.2% in March, from an upwardly revised February level (see the chart below).  Shipments of nondefense capital goods excluding aircraft are the component of this report most directly linked to the equipment and software component of GDP.  New orders of nondefense capital goods excluding aircraft increased 4.0 percent in March, suggesting that this sector is likely to remain strong in the near future.  Shipments of aircraft are also part of equipment and software investment, and the information in this report suggests a sharp decline in this component of investment in the first quarter. 

    CEA 042310 Figure 1

    Overall, equipment and software investment appears stronger than it did a month ago because of the increase in shipments of core capital goods in March and the upward revision in February.  Despite the decline in aircraft shipments, equipment and software investment in the first quarter is likely to be positive due to the increase in capital goods shipments excluding aircraft, a quarterly increase in motor vehicle sales, and a persistent increase in software investment.   This, together with indicators of manufacturing production and employment, suggest continued recovery in the manufacturing sector.

    Steven Braun is the Director of Macroeconomic Forecasting at the Council of Economic Advisers.

  • Impact of the American Recovery and Reinvestment Act on the Clean Energy Transformation

    A central piece of the American Recovery and Reinvestment Act of 2009 (ARRA) is more than $90 billion in government investment and tax incentives to lay the foundation for the clean energy economy of the future.  These investments and tax incentives include everything from energy efficiency retrofits to modernizing the electrical grid to tax credits for advanced clean energy manufacturing.  These clean energy investments are also providing crucial stimulus to the economy today.  The CEA’s third quarterly report on the impact of the ARRA, released on April 14, found that the Act as a whole raised employment by between 2.2 million and 2.8 million jobs over what it would otherwise have been.  In a new supplement to the report, we focus in detail on the macroeconomic impact of the Act’s clean energy provisions.
          
    Table 1 lists the clean energy provisions in the ARRA, grouped into nine functional categories.  Column 1 shows that of the original $787 billion estimated cost of the Act, $90 billion was devoted to clean energy programs.  The last two columns indicate that nearly $40 billion of this total has already been obligated for specific clean energy projects, and more than $9 billion has been outlayed.

    042110 CEA Table 1

    To estimate the short-run economic impact of the ARRA’s clean energy investments, we use the CEA macroeconomic model described in our third quarterly report.  Table 3 of the supplement shows the results.  We find that the Recovery Act created more than 80,000 clean energy jobs as of the first quarter of 2010, and that the clean energy investments supported an additional 20,000 jobs throughout the economy.  Importantly, these estimates include only employment related to projects that have received actual outlays to date.  In many cases, the additional $20 billion in obligations shown in Table 1 may have already generated economic activity because recipients may begin spending as soon as they are certain funds are available.  Looking over a longer horizon, the ARRA’s clean energy provisions will support about 720,000 job-years through 2012.  (A job-year is the equivalent of one worker employed for one year.)  Thus the Act will be a source of both employment and progress on clean energy for years to come.

    CEA 042110 Table 3

    Christina Romer is the Chair of the Council of Economic Advisers.

  • Impact of the American Recovery and Reinvestment Act on Employment by State

    The CEA’s third quarterly report on the impact of the American Recovery and Reinvestment Act (ARRA), released earlier this week, found that the ARRA raised employment as of the first quarter of 2010 by between 2.2 million and 2.8 million jobs over what it would otherwise have been.  There is obviously much interest in how these employment effects have been distributed across states. Our first quarterly report, last summer, developed methods for examining state-level employment impacts.  We have updated those analyses to estimate the number of jobs that the ARRA created or saved in each state as of the first quarter of 2010. 

    Estimates for all fifty states, plus the District of Columbia, are reported in Table 1. The methodology is described in detail in a supplement to the third quarterly report.  However, it is important to emphasize that these disaggregate estimates are inherently more speculative and uncertain than are aggregate estimates.

    Of course, we estimate that larger states have seen larger jobs impacts, simply because their populations are larger.  Similarly, industrial states are estimated to have had larger employment effects relative to their populations because manufacturing employment is more cyclically sensitive.  Finally, both because of their industrial composition and because state fiscal relief and aid to individuals directly impacted have been larger in states hit harder by the recession, we estimate that states with higher unemployment rates at the time of passage have seen larger employment effects of the ARRA relative to their populations.
    The estimates in Table 1 are calibrated to add up to 2.8 million jobs, the estimated employment impact of the ARRA in 2010:Q1 according to one of the two methods that the CEA uses to estimate the ARRA’s impact (see Table 3 of the third quarterly report).

    This approach yields somewhat higher overall employment impacts than does our other method, which indicates that 2.2 million jobs were created or saved.  Thus, it is possible that the estimates in Table 1 somewhat overstate the true impacts.  But there is no reason to expect that this would lead to changes in the distribution of jobs impacts across states. 

    CEA 041510 State Data Table

     

    Christina Romer is the Chair of the Council of Economic Advisers
    Jesse Rothstein is a Senior Economist at the Council of Economic Advisers who focuses on Labor, Education, and Welfare

  • Council of Economic Advisers Releases a New Report on the Recovery Act

    As part of the unprecedented accountability and transparency provisions included in the American Recovery and Reinvestment Act of 2009 (ARRA), the Council of Economic Advisers (CEA) was charged with providing to Congress quarterly reports on the effects of the Recovery Act on overall economic activity, and on employment in particular. Today we released our third report (pdf), with an assessment of the effects of the Act through the first quarter of 2010.

    The main macroeconomic findings include:

    • The magnitude of the fiscal stimulus increased substantially in the first quarter of 2010 (from $83 billion in 2009:Q4 to $112 billion in 2010:Q1) largely because of a surge in tax refunds and lower final tax liabilities due to the Making Work Pay tax credit.
    • Government investment outlays in areas such as infrastructure and clean energy, which increased $16 billion in 2010:Q1, are expected to rise further throughout 2010.
    • The CEA estimates that as of the first quarter of 2010, the ARRA has raised employment relative to what it otherwise would have been by between 2.2 and 2.8 million. These estimates are broadly similar to those of other analysts. Our estimates incorporate the most recent information about actual Recovery Act spending and tax reductions, as well as current trends in employment and production.

    A special section of the report focuses specifically on the impact of the tax relief and income support provisions of the Recovery Act:

    • To date, there has been more than $200 billion of tax relief and income support provided to households by the ARRA. These funds have had a disproportionately large impact on the incomes of middle- and lower-income families. 
    • CEA estimates that without these provisions, household real disposable income would have fallen substantially in 2009. Figure 6 from the report (reproduced below) shows actual after-tax family income alongside income without the tax relief and income support provisions of the Recovery Act. Without the tax cuts and income support provisions of the ARRA, consumer spending would not have rebounded as it did and, indeed, would likely have continued to fall.
    • As of 2010:Q1, the tax relief and income support provisions of the Recovery Act have saved or created between 1.1 and 1.4 million jobs, or roughly one-half of the total number of jobs saved or created by the Act.

    Identifying the impact of policy actions is inherently difficult, and the estimates must be understood to be subject to large margins of error. For this reason the CEA has approached its task from a wide range of perspectives, all of which point to a key role for the ARRA in helping the economy recover from the worst recession since the Great Depression. The CEA will continue to monitor the effects of this important policy initiative over the coming months and years.

    CEA 041410 Figure 6

    The data in this chart is available to download as a csv file.

    Christina Romer is the Chair of the Council of Economic Advisers