Monday, November 1, 2010

Final Sales for the Third Quarter

The new GDP report has come out, and there is both good news and bad news. Final Sales of Domestic Product was $14,600 billion in the third quarter of 2010, which has finally passed its previous peak of $14,514 billion in the third quarter of 2008, what I count as the end of the Great Moderation and the beginning of the Great Recession. Money expenditures have finally "recovered."

Unfortunately, the growth of of Final Sales of Domestic Product was only 2.8 percent, and so continued to fall further behind the growth path of the Great Moderation. If money expenditures had continued to grow at the 5.4 percent growth path of the Great Moderation, the value in the third quarter of 2010 would have been $16,721 billion. The current value of money expenditures is 13 percent below the growth path of the Great Moderation, and the gap continues to grow.

For money expenditures to return to the growth path of the Great Moderation by the third quarter of 2011, an annual growth rate of 21 percent would be necessary. The target for the third quarter of 2011 would $17,652 billion.

I have long favored moderate disinflation. In my view, a 5 percent growth path for money expenditures is too inflationary. Rather than planning on a 2 percent inflation rate, a zero inflation trend would be better. While I would not have picked the Fall of 2008 as a time to change the monetary regime to a slower growth path of money expenditures, now that money expenditures have fallen so far from the previous 5 percent growth path, I support some opportunistic disinflation.

Below is Final Sales of Domestic Product since 1984, the 5 percent trend growth path from 1984 to the fall of 2008, and projected through 2012, and my preferred adjusted growth path that shifts to a 3 percent growth path in the Fall of 2008.

With the adjusted growth path for money expenditures, the gap between its current value and target value is smaller. It is now 8.4 percent. To return to the adjusted growth path, it would
would need to increase by 13.8%. The target for the third quarter of 2011 would be $16,415 billion.

A 13.8 percent growth rate for money expenditures is quite rapid. After one year, the growth rate would return to the noninflationary 3 percent rate.


  1. o/t but in an old comment at Beckworth's you talk about medium of account and medium of exchange needing to be linked, and if not explicitly, you investigated by market prices, disequilibrium.... That that has been in my head for a while, and I was just wondering if you have a paper, or something from that work.

  2. Bill, Why should we not also look at the year-over-year rate of change in gross domestic purchases relative to the pre-crisis trend growth rate? Gross domestice purchases excludes the impact of the trade deficit, and might therefore be a more informative proxy -in "totality" - for the level of aggregate demand in the economy than final sales. The advance report for Q3 shows growth in gross domestic purchases (y-o-y) of 5.3 %, which is much higher than the 2.4% growth rate in final sales. Gross domestic purchases indicates much stronger growth in business and consumer spending, even if not all of it stays in the U.S. (i.e., domestic production).