Recovery Act Third Quarterly Report - Evidence of Economic Impact
EVIDENCE OF THE ECONOMIC IMPACT OF THE RECOVERY ACT
In this section, we consider a range of ways of estimating the overall impact of the Recovery Act. We begin with a straightforward examination of the behavior of GDP and employment, and then move on to more sophisticated analyses using a statistical forecasting exercise, an economic model, and the direct reporting data. Although none of these approaches is definitive, together they provide considerable evidence that the Recovery Act has played a critical role in moving the economy from accelerating decline to the beginnings of recovery.
The Change in the Economy’s Trajectory
The first way that we investigate the impact of the Recovery Act is to consider the behavior of real GDP and employment. Are the changes that we have observed in these two key indicators over the past year consistent with the Act having substantial effects?
The data in this chart is available to download as a csv file. April 14, 2010. (by CEA)
Figure 1 shows the growth rate of real GDP. The dashed line between the first and second quarters of 2009 separates the period before the Recovery Act (which was signed February 17, 2009) could have had a significant impact on the economy from the period after. GDP fell progressively more rapidly from the third quarter of 2008 to the first quarter of 2009, but then began to reverse course quickly after the passage of the Recovery Act. After declining at an annual rate of 6.4 percent in the first quarter of 2009, GDP fell at a rate of 0.7 percent in the second quarter, and then rose at a rate of 2.2 percent in the third quarter and 5.6 percent in the fourth. The improvement in growth of 12 percentage points from the first quarter to the fourth (that is, the swing from growth at a -6.4 percent rate to growth at a 5.6 percent rate) was the largest over any three quarters since 1981, and the second largest since 1958.
Figure 1 also shows the April 10 Blue Chip Consensus forecast for real GDP growth in the first quarter of 2010. That forecast is 2.9 percent (Blue Chip Economic Indicators, 2010). Forecasters believe that the extremely rapid growth we saw in 2009:Q4 moderated considerably in 2010:Q1, as the influence of temporary inventory investment changes lessened substantially. Importantly, real GDP growth is expected to remain solid in 2010 and to increase somewhat in 2011. The first official GDP estimate for 2010:Q1 will be released on April 30.
Figure 2 presents the behavior of the change in payroll employment. Employment shows the same pattern of an accelerating decline reversing course rapidly after the Recovery Act was passed. In the first quarter of 2009, the economy lost on average an astounding 753,000 jobs per month. Job losses fell to 477,000 per month in the second quarter, 261,000 per month in the third, and 90,000 in the fourth. The economy began adding jobs in the first quarter of 2010, with average gains of 54,000 per month. The change in the average monthly change in employment over the past four quarters was among the largest on record.
The data in this chart is available to download as a csv file.
The economy is obviously still far from healthy. Real GDP is substantially below its normal path, and the unemployment rate remains at 9.7 percent. Moreover, job growth of 54,000 per month is well short of the robust job growth needed to bring down the unemployment rate quickly. But economies do not switch from rapid decline to robust growth all at once. Given what we now know about the frightening momentum of economic decline in the first quarter of 2009, it would have been hard for the economy to stabilize much faster than it did.
The timing of the change in trajectory is highly suggestive of an important role for the Recovery Act. At the time the Act was passed, the economy was in freefall. Real output stabilized dramatically in the quarter after the Act was passed, and began growing again in the next quarter. Similarly, job losses began to moderate rapidly in the quarter after the Act was passed, and continued to slow greatly in the subsequent two quarters. A year after passage of the Act, extraordinary job losses have been replaced by modest job gains.
Estimates of Effects from Comparison to a Statistical Baseline Forecast
The timing and magnitude of the change in the trajectories of GDP and employment suggest an important role for the Recovery Act. One limitation of this analysis is that it does not attempt to describe the counterfactual for what would have happened in the absence of the fiscal stimulus. To address this issue, here we consider a sensible statistical forecast of the likely path of GDP and employment in the absence of stimulus. We can then interpret the discrepancy between actual developments and this forecast as an estimate of the impact of policy.
There are many ways to construct a statistical baseline forecast. The particular approach that we use is to estimate a vector autoregression (or VAR) using the logarithms of real GDP (in billions of chained 2005 dollars) and employment (in thousands, in the final month of the quarter) over the period 1990:Q1–2007:Q4. We include four lags of each variable. Because the estimation ends in 2007:Q4, the coefficient estimates used in the prediction are not influenced by developments in the current recession. Rather, they show the usual joint short-run dynamics of the two series over an extended sample. We then forecast GDP and employment beginning in the second quarter of 2009 using actual data through the first quarter of 2009.5 Data through the first quarter include the monetary response to the current crisis, but not the fiscal stimulus or other actions that took effect after the first quarter. We have experimented with a variety of other ways of projecting the no-stimulus path of GDP and employment. The results of those exercises are similar to those we report below.
Figure 3 shows the results of this forecasting exercise for GDP, together with the actual path of GDP. Past history would have led one to expect GDP to continue to decline in the second and third quarters of 2009 before beginning to grow moderately in the fourth quarter. The figure shows that actual GDP has risen steadily above the forecast path. It was 0.7 percent above that path in 2009:Q2, 1.4 percent above in 2009:Q3, and 2.5 percent above in 2009:Q4. The Blue Chip forecast of 2.9 percent growth in the first quarter of this year suggests that the gap between the actual and forecasted levels of GDP in 2010:Q1 was about 2.9 percent.6
The data in this chart is available to download as a csv file.
Table 3 summarizes the difference between the actual and forecasted paths of GDP using the statistical projection methodology.
Figure 4 shows the results for employment. Because employment growth normally changes relatively slowly, the usual historical patterns would have led one to expect employment losses to moderate only slowly over the course of 2009 and to continue through the middle of 2010. Actual employment losses moderated much more rapidly. As a result, employment was about 300,000 above the forecast path as of the middle of 2009:Q2, 1.1 million above as of the middle of 2009:Q3, 1.9 million above as of the middle of 2009:Q4, and 2.8 million above as of the middle of 2010:Q1. These results are also summarized in Table 3.
The data in this chart is available to download as a csv file.
The projection methodology used here shows that using the past history of GDP and employment and actual data through 2009:Q1, one would have predicted that GDP in the first quarter of 2010 would be about 2.9 percent lower than it actually was, and that employment would be about 2.8 million lower than it actually was. To ascribe much of these differences to the Recovery Act, the key policy action taken in 2009:Q1, is certainly plausible. However, other policy actions, such as the Financial Stability Plan, monetary policy, and the Federal Reserve’s program of buying agency debt and long-term U.S. government bonds, surely contributed to the difference. Also, any other factors not captured by the past history of GDP and employment, such as unusual moves in foreign demand or asset prices, would also be captured in the difference.
The overall effect of the policies other than the Recovery Act and non-policy factors on GDP and employment could be either positive or negative. For example, while the various actions to improve financial conditions have surely had a positive impact, the continuing stringency in credit conditions is most likely restraining GDP and employment relative to their usual cyclical patterns. Thus, the forecast residuals could either overestimate or underestimate the impact of the Recovery Act.
Equally important, the estimates from this approach have considerable margins of error. At any time, the economy is subject to many influences that are not reflected in the past behavior of GDP and employment. These influences may be particularly large in a period as turbulent as the past year. And, the longer the time that has passed, the larger the role of those disturbances is likely to be. As a result, the estimates from this approach are likely to be less reliable as more time elapses, and should be viewed only as rough guides to the effects of the Recovery Act.
Estimates of Effects from an Economic Model
Another way to estimate the effects of the Recovery Act on employment and GDP is to use existing estimates of the macroeconomic effects of fiscal policy. That is, one can use mainstream estimates of economic multipliers for the effects of fiscal stimulus. The version of this approach that we use here is identical to that used in the CEA’s first two quarterly reports on the Recovery Act.7
This exercise, like the one based on statistical projections, will obviously not yield exact figures for the effects of the Recovery Act. To begin with, there is uncertainty about the size of the economic effects of a “typical” increase in government purchases or a “typical” tax cut. There is even more uncertainty about the precise timing of those effects, and modest changes in timing have noticeable effects on the impact at a specific point in time. In addition, the current exceptional economic environment could make the effects of stimulus somewhat larger or smaller than normal, or could cause them to occur somewhat more or less quickly. Finally, the Recovery Act—appropriately—was not just typical stimulus. For types of stimulus that are used less frequently, there is even greater uncertainty about the size and timing of the macroeconomic effects.
As in the earlier reports, we use figures on actual outlays and tax relief under the Recovery Act. Since CEA’s second quarterly report, the Office of Tax Analysis of the Department of Treasury has made minor revisions to their estimates of the tax provisions to better align their coverage with the data on outlays, leading to minor revisions in our estimates of the impact on GDP and employment in 2009.
The results of this analysis are shown in Table 4. They imply that the Recovery Act is having a substantial beneficial effect on production and employment. Specifically, they suggest that the Recovery Act raised the level of GDP relative to what it otherwise would have been by 0.7 percent in the second quarter of 2009; 1.7 percent in the third quarter; 2.1 percent in the fourth quarter; and 2.5 percent in the first quarter of 2010.8 The approach also suggests that the Act increased employment relative to what it otherwise would have been in 2009:Q2 by about 400,000 jobs; in 2009:Q3 by about 1.1 million jobs; in 2009:Q4 by about 1.7 million jobs; and in 2010:Q1 by about 2.2 million. Both the GDP and employment estimates are broadly similar to the estimates described in Section III.B based on the statistical projection approach.
Evidence of Effects from Recipient Reporting
One hallmark of the Recovery Act has been an unprecedented commitment to providing timely, transparent, and accountable information about the Act’s progress, allowing the public to “follow the dollar” as it is spent. In pursuit of this goal, the Act requires every prime recipient of Recovery Act funds subject to Section 1512 of the Act to file quarterly reports on the employment effects of the Act. The recipient reports are designed to reflect an estimate of individual, identifiable jobs and to provide a source of independent evidence of the effects of the Recovery Act.
Section 1512 of the Recovery Act requires prime recipients of Recovery Act funds for “projects and activities” to file quarterly reports. It is obviously not possible to identify specific jobs associated with the Recovery Act for the types of stimulus, such as individual tax cuts and extended unemployment insurance benefits, that support spending on a broad range of goods and services produced by a wide range of firms. Largely for that reason, there are no recipient reports associated with the components of the Recovery Act that consist of tax reductions, including the Making Work Pay tax credit, and with many categories of spending, including unemployment insurance benefits and aid to states under the temporary Medicaid FMAP increase. Altogether, funds subject to the recipient reporting requirement comprise about one-third of the total funding of the Act.
There have now been two rounds of recipient reports. The first reports were filed in October 2009 and described activity from the passage of the Act through September 30, 2009. The second reports were filed in January 2010 and covered the period between October 1 and December 31, 2009. In response to feedback from recipients and data users after the first round, the reporting requirements were changed slightly for the second round. The initial instructions asked recipients to make complex judgments about whether a job would have been filled “but for” funding under the Recovery Act. The instructions for the second reports simply asked recipients to report jobs funded by Recovery Act funds in 2009:Q4, without trying to assess whether the jobs would have existed or not in the absence of the Act.
The first set of reports indicated a total of 640,329 full-time-equivalent jobs created or saved by the Recovery Act in the period through September 30. The second set of reports identified 608,317 full-time equivalent jobs funded by the Act in 2009:Q4. The third set of reports, covering 2010:Q1, are being filed this month.
As described in the CEA’s second quarterly report, there are many reasons that the figures from the recipient reporting data do not provide a comprehensive or exact accounting of the jobs created or saved by the Recovery Act (CEA, 2010, pp. 29-31). One key reason has already been mentioned: the reporting requirements will only apply to about one-third of the overall funding under the Act. Moreover, for the stimulus that has occurred thus far, the fraction is even smaller. The direct spending components of the Act, which are the main ones subject to the reporting requirements, were expected to spend out more slowly than other components and to play an important role in providing support to the economy over an extended period. As a result, spending subject to the reporting requirements has been only a relatively small fraction of the total stimulus so far.
Table 5 shows obligations, outlays, and tax reductions in 2009:Q3, 2009:Q4, and 2010:Q1 for both the Recovery Act as a whole and for the subset of programs subject to recipient reporting requirements.9 Only 18 percent of the stimulus—outlays and tax cuts—in 2009:Q3 was covered by recipient reports. For 2009:Q4, the figure was 21 percent; and for 2010:Q1, it was 17 percent.
Although the recipient reporting data cannot be used directly to determine the overall impact of the Recovery Act on employment, the data provide a useful check on the estimates from the aggregate approaches described in Sections III.B and III.C. One simple way to perform such a check is to note that while the funds subject to the reporting requirements were only 18 percent of total outlays and tax cuts in 2009:Q3, the jobs figures from the recipient reports are substantially more than 18 percent of the estimates from the projection and model approaches for 2009:Q3. Likewise, funds subject to reporting requirements in the fourth quarter were just 21 percent of total outlays and tax cuts, but the jobs numbers from the reports are well above 21 percent of the estimates of the overall jobs effects from the aggregate approaches for 2009:Q4. Indeed, for both quarters, the figures from the direct reports are over 30 percent of the estimates from the two aggregate approaches. Thus, this comparison suggests that the jobs estimates from the aggregate approaches are, if anything, somewhat low.
In the case of the model approach, we can improve on this simple comparison by asking what the approach implies about the jobs impact not from all of the Recovery Act, but only from an amount of government spending equal to the amount subject to the recipient reporting requirement. Further, we can adjust the multipliers used in the model to omit the estimates of jobs created by the additional spending by the workers who are employed on the projects (which are obviously not included in the recipient reports); this brings the multiplier-based estimates closer to what the recipients were asked to report. This comparison again yields a considerably smaller estimate from the model approach than from the recipient reporting data for both 2009:Q3 and 2009:Q4. Thus, it again suggests that the model is not overstating the jobs effects.
In short, the recipient reports support the view that the ARRA has had a large, rapid impact on employment. Indeed, the recipient reports not only reinforce the reliability of the broader estimates produced by the CEA’s statistical and economic models, they suggest that these models could be understating the jobs impact of the Recovery Act.
Comparison with Other Estimates of the Effects of the Recovery Act
Many other economists and forecasters have estimated the likely effects of the Recovery Act. Most of those estimates are based on formal macroeconomic models. These estimates serve as a check of the reasonableness of our own estimates.
Table 6 reports estimates of the contribution of the Recovery Act to GDP in the four quarters since the Act was passed from an array of public and private forecasters.10 The first row repeats the estimates from Section III.B based on the comparison of actual outcomes with projections of the normal evolution of the economy, and the second row shows our model-based estimates from Section III.C. The next two rows show the low and high estimates prepared by the Congressional Budget Office. The estimates from both of our approaches are well below the top of the CBO range, and are generally in its lower part. The remaining lines of the table show the private sector estimates that we have been able to gather. These estimates are generally similar to ours.
Fewer estimates of the employment effects of the Recovery Act are available. Those that we have been able to gather are reported in Table 7, together with the estimates from our two approaches.11 Again, our estimates are generally within the range of other projections, though somewhat above the median. The fact that such a range of public and private forecasters broadly agree with the CEA’s estimates of the impact of the Recovery Act on GDP and employment should increase confidence that the Act is having a substantial stimulative effect.
To the degree that the estimated employment effect from our model approach in 2010:Q1 is somewhat larger than that of some other forecasters, it is useful to note that our estimate is based on the most recent spending and tax reduction data, whereas some of the private sector estimates have not been updated since last summer. Also, our employment effect is derived from the GDP effect using standard estimates of the usual relationship between the two series. That our GDP estimate is squarely in the middle of the range of other GDP estimates therefore adds credence to our employment estimate. Finally, our projection approach takes into account the actual behavior of employment, which has changed dramatically over the previous year, while most of the other estimates are based largely on a historical multiplier approach.
In light of the actual behavior of GDP, the estimates in Table 6 suggest that most forecasters believe that in the absence of the Act, GDP would have declined sharply in 2009:Q2 and continued to decline in 2009:Q3, and that growth would have been considerably weaker in 2009:Q4 and 2010:Q1 than it actually was. Likewise, the estimates in Table 7 imply that most forecasters believe that jobs losses would have moderated much more slowly than they actually did over the course of 2009, and that substantial job losses would be continuing in 2010.
5 The estimation methodology in this report is the same as in previous CEA reports on the Recovery Act. The estimates have changed slightly, however, because comprehensive data revisions have altered some of the data used in the estimation.
6 These differences in the actual and projected levels of GDP imply substantial differences in the growth rates of GDP. Specifically, they imply that GDP growth in 2009:Q2 was 2.8 percentage points higher than the baseline projected growth; in 2009:Q3 it was 2.9 percentage points higher; in 2009:Q4 it was 4.4 percentage points higher; and in 2010:Q1 it was 1.6 percentage points higher.
7See Council of Economic Advisers (2009b, p. 23) for more details.
8These effects on the level of GDP again imply large impacts on the growth rate of GDP. Specifically, the model estimates indicate that the ARRA raised GDP growth in 2009:Q2 by 2.8 percentage points; in 2009:Q3 by 3.8 percentage points; in 2009:Q4 by 1.7 percentage points; and in 2010:Q1 by 1.5 percentage points.
9 The numbers in the table do not match those implied by Table 10 of the CEA’s second quarterly report exactly because of a subsequent modification to the list of projects subject to Section 1512 reporting.
10The sources are as follows. CBO: CBO (2010b). Goldman Sachs: described in Goldman Sachs (2009); updated figures from Alec Phillips, email communication, April 7, 2010. IHS/Global Insight: figures from Nigel Gault, email communication, January 11, 2010. James Glassman, J.P.Morgan Chase: Glassman (2010). Macroeconomic Advisers: Macroeconomic Advisers (2009a, 2009b); exact figures from email communication, August 10, 2009. Moody’s economy.com: described in Zandi (2010); exact figures from Mark Zandi, email communication, April 7, 2010. Before using estimates from sources used in our earlier reports, we checked with each forecaster to ensure that their estimates of the effects of the Act had not changed.
11 The sources are the same as for Table 6.