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US National Accounts Data – No sign that interest rates are working the way economists think

On October 26, 2023, the U.S. Bureau of Economic Analysis released the latest U.S. National Accounts data— Gross domestic product in the third quarter of 2023 (estimated) – Shows “the annual growth rate of actual gross domestic product (GDP) in the third quarter of 2023 was 4.9%”. Growth in the June 2023 quarter was 2.1%. All spending components rose broadly, including those most sensitive to rising interest rates. Of course, my premise is that interest rates will not significantly reduce economic growth in the short term, and the mainstream New Keynesian theory believes that raising interest rates is an effective tool to adjust total expenditure, thereby reducing inflation. Reality does not support mainstream claims. However, the national accounts released continuously by the United States show that total expenditure is flexible in the face of interest rate hikes.

Monetary policy is ineffective – US economy

The U.S. Bureau of Economic Analysis stated:

Growth in real GDP reflects increases in consumer spending, private inventory investment, exports, state and local government spending, federal government spending, and residential fixed investment, which were partially offset by declines in nonresidential fixed investment… Calculation of GDP The amount increases.

As a result, U.S. spending is growing across the board.

“Growth in consumer spending reflects growth in services and goods,” and is therefore also broad-based.


The acceleration in real GDP in the third quarter compared with the second quarter reflected an acceleration in consumer spending, private inventory investment and federal government spending, as well as a rise in exports and residential fixed investment.

In an environment where monetary policy continues to struggle to curb spending, one might legitimately ask the question why we think monetary policy is the most effective macroeconomic policy tool—a view dominated by mainstream New Keynesians.

If the US government had tightened fiscal policy significantly over the past 12 months, we would not have observed the real GDP growth rates now evident.

Also, note that BEA is using annualized quarterly data here (multiplying the September quarter growth rate of 1.2% by 4) rather than the actual annual (year-over-year) growth rate, which is a percentage compared to the September quarter growth rate Variety. 2022 quarter to September 2023 quarter.

The total was up 2.93% from 2.38% in the June 2023 quarter.

The following series of charts captures the story.

The first graph shows annual real GDP growth (year-on-year) and quarterly growth (blue line) from the peak of the previous cycle (December 2007 quarter) to the March 2020 quarter (grey bar). Please note that the date line starts with the March 2008 quarter.

The chart below shows the evolution of the private investment-to-GDP ratio from the March 2008 quarter (the peak of real GDP before the global financial crisis recession) to the September 2023 quarter.

Business investment is one of the national accounting aggregates considered by mainstream economists to be highly sensitive to changes in interest rates.

The data doesn’t show this.

The disruption caused by the pandemic is evident, as is the stagnant performance following the initial recovery from the global financial crisis.

The ratio has fallen in recent quarters as investment spending has grown less than real GDP. This situation reversed in the third quarter of 2023.

The current investment rate is about pre-pandemic levels and does not show a dramatic “cliff fall” dynamic.

The question is why would broad-based spending growth resist raising interest rates?

Several factors appear to be at play.

First, recent growth in real wages has stimulated consumer spending.

Second, the wealth effect is at work, with household net worth growing significantly during the pandemic, largely due to rising housing prices and a booming stock market.

Keep in mind that we are talking about macroeconomic aggregates here, and we acknowledge that growth in wealth has been highly concentrated among a small group of already wealthy Americans, while many at the bottom of the income and wealth distribution are suffering considerably as a result of rising interest rates. Big pain.

The problem that plagues much macroeconomic analysis in trying to assess the impact of interest rates – so-called – observational equivalence – question.

This refers to the following situation (in our context):

…the theories are observationally equivalent if all empirically testable predictions are the same, in which case empirical evidence cannot be used to distinguish which one is closer to being true; indeed, they may actually be Two different views on the same basic theory.


1. The mainstream theory is that raising interest rates will lower inflation.

2. My framework believes that inflation will fall relatively quickly because it is driven by supply-side factors related to the pandemic and the situation in Ukraine and OPEC, so there is no need to raise interest rates.

The empirical reality is that while interest rates rise, inflation falls quite rapidly.

The data cannot establish cause and effect.

Beyond this, according to proposition one, we should also see a significant slowdown in aggregate spending, as mainstream frameworks attribute inflationary pressures to demand-side factors (too much spending relative to supply) and interest rate hikes are seen as This stress can be reduced. expenditure.

The last fact—the validity of Proposition 2.

Some commentators say that U.S. spending growth is about to slow down due to various factors (reversing the above-mentioned wealth effect, student loan repayment time, etc.), but this does not save Proposition 1.

contribution to growth

The next chart compares the contribution to real GDP growth at broad spending aggregate levels in the June 2022 quarter (grey bars) with the September 2023 quarter (blue bars).

With the exception of net exports, all major spending components contributed to strong GDP growth in Q9 2023.

All rate-sensitive components – consumer and investment spending – were strong.

Government spending, especially federal spending, also drives economic growth.

Net exports were a negative contributor, but only because strong domestic growth spurred import growth, which grew faster than exports.

The chart below breaks down the government sector and shows the strong contribution to growth from all levels of government.

I expect defense spending to increase significantly as the U.S. government helps Israel massacre innocent people in Gaza.

In order to better understand the situation of investment expenditure, the figure below provides a detailed analysis of the contribution of various components of investment to real GDP growth.

I don’t see any material negative interest rate impact in these data.

U.S. household consumption and debt

Publications of the Federal Reserve Bank of New York – Household Debt and Credit Reports – Last updated June 2023 quarter (published August 2023) – (PDF download).


In the second quarter of 2023, total household debt increased by $16 billion to $17.06 trillion…Credit card balances grew rapidly, increasing by $45 billion to a series high of $1.03 trillion. Other balances, which include retail credit cards and other consumer loans and auto loans, increased by $15 billion and $20 billion, respectively. Student loan balances fell by $35 billion to $1.57 trillion, while mortgage loan balances remained essentially unchanged at $12.01 trillion.

Consumer lending does not appear to have taken a major hit.

The data also shows:

After falling sharply early in the pandemic, overall delinquency rates were roughly flat in the second quarter of 2023 and remained at low levels.

Again no signs of collapse.

in conclusion

Given that the current inflation rate is around 3.7% per year, and the inflation rate peaked at 9.1% in June 2022, Fed officials are undoubtedly congratulating themselves.

“Well done” they will say, we avoided a recession and achieved what is known as a “soft landing.”

According to media reports, Fed economists were “surprised” by the strong growth in spending shown in national accounts data.

Surprise reflects ignorance rather than any event expected by an expert with a reasonable understanding.

The housing market has slowed due to rising mortgage rates, but the U.S. economy has not slowed significantly.

This is not surprising.


Because if the goal is to reduce aggregate spending, monetary policy is a very weak tool.

This tells me that mainstream macroeconomics is making the wrong bet.

That’s enough for today!

(c) Copyright 2023 William Mitchell. all rights reserved.

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