Krugman: Why One Quarter's Growth Tells Us Nothing

[dalton99a]

https://www.nytimes.com/2018/07/28/opinion/why-one-quarters-growth-tells-us-nothing.html

Why One Quarter’s Growth Tells Us Nothing
By Paul Krugman
July 28, 2018

For the most part, reporting on 2nd quarter growth has been pretty decent. But I haven’t seen clear explanations of why one quarter’s growth tells us so little about longer-term growth prospects. I’m sure that reporters get it; maybe they assume that readers already know (a very bad assumption), or maybe they’re afraid of sounding too technical. But anyway, it seems as if there’s a gap worth filling; so here it comes.

The key point when you look at real GDP is that the economy’s actual output depends both on its capacity – the amount it is capable of producing on a sustained basis – and the rate at which it is using that capacity. That is,

Output = capacity * capacity utilization

CBO actually produces an estimate of capacity – “potential GDP” – which you can argue with, but is a useful benchmark. And you can look at the ratio of actual GDP to potential, which is an indication of how hot the economy is running:



.....

In short, one quarter’s growth is a nothingburger. The real news is that we’re still waiting for both the investment surge and the wage gains the tax cutters promised; as far as we can tell, they’re never coming.