A major recurrent theme in economics is whether to adhere to conventional wisdom or to deviate to cope with new circumstances.

The BEA has released the preliminary (or second estimate) GDP figures for the third quarter.  Compared to the advance estimates released at the end of last month, the annual growth rate is down from 3.5 to 2.8 percent.

The second estimate of the third-quarter increase in real GDP is 0.7 percentage point lower, or $23.7 billion, than the advance estimate issued last month, primarily reflecting an upward revision to imports and downward revisions to personal consumption expenditures and to nonresidential fixed investment that were partly offset by an upward revision to exports.

Taking stock of where we are, it is clear that the third quarter was heavily influenced by government spending at the federal level.  Some highlights:

Here's my column from today's Roll Call about what Lehman et al mean for the federal budget.

Lehman a Year Later: Some Budget Lessons Learned, Others Yet to Sink In

Sept. 15, 2009

It was just about a year ago that I returned from a blissful trip in Yosemite National Park to find that the financial world had completely changed. While my friends and I were primarily focused on breathing and blisters and I was doing everything possible to avoid the news (I even covered my eyes as I walked past the boxes that displayed front pages), Fannie Mae and Freddie Mac were seized, Lehman Brothers failed, and credit markets froze.

Last week, I offered some reactions to Paul Krugman's New York Times magazine article.  One of the economists coming in for direct criticism as a representative of the Chicago School was John Cochrane.  Through the magic of the internet, he responds.  One of my favorite passages:

If you believe the Keynesian argument for stimulus, you should think Bernie Madoff is a hero. Seriously. He took money from people who were saving it, and gave it to people who most assuredly were going to spend it. Each dollar so transferred, in Krugman’s world, generates an additional dollar and a half of national income. The analogy is even closer. Madoff didn’t just take money from his savers, he really borrowed it from them, giving them phony accounts with promises of great profits to come. This looks a lot like government debt.

Read the whole thing.

I'm coming a little late to this party, but only fashionably so.

This all started last Sunday with Paul Krugman's thought-provoking/anger-inducing article in The New York Times Magazine, "How Did Economists Get It So Wrong."  The following day, Andrew challenged some of Krugman's basic assertions in a post that got Pete exercised the day after.  Yesterday, possibly just to embarass me for being late to class, Bruce expressed a few thoughts as well.  And earlier today, Andrew added some fuel to the fire with this.

Gentlemen...I admire and respect you all but thou doth protest too much me thinks.  Economists are not the problem.

Paul Krugman's essay in yesterday's New York Times magazine has me puzzled.  Specifically, I think the longstanding divide between the "freshwater" (i.e. Chicago and Minnesota) and "saltwater" (e.g., Harvard, MIT, Princeton, Stanford and other coastal universities) schools of macroeconomics is of little relevance to an explanation of "How Did Economists Get It So Wrong?"  Here is what Krugman claims that economists got wrong:

The Bureau of Economic Analysis released the advance estimate of third quarter GDP this morning.  The headline is:

Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- decreased at an annual rate of 0.3 percent in the third quarter of 2008, (that is, from the second quarter to the third quarter), according to advance estimates released by the Bureau of Economic Analysis.  In the second quarter, real GDP increased 2.8 percent.

[...]

The decrease in real GDP in the third quarter primarily reflected negative contributions from personal consumption expenditures (PCE), residential fixed investment, and equipment and software
that were largely offset by positive contributions from federal government spending, exports, private inventory investment, nonresidential structures, and state and local government spending.  Imports, which are a subtraction in the calculation of GDP, decreased.

This morning brought two pieces of news from the BLS.  First, real earnings declined last month:

Real average weekly earnings fell by 0.8 percent from June to July after seasonal adjustment, according to preliminary data released today by the Bureau of Labor Statistics of the U.S. Department of Labor.  A 0.3 percent increase in average hourly earnings was more than offset by a 0.3 percent decrease in average weekly hours and a 0.9 percent increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).

Second, initial claims for unemployment insurance continue to be high:

In the week ending Aug. 9, the advance figure for seasonally adjusted initial claims was 450,000, a decrease of 10,000 from the previous week's revised figure of 460,000. The 4-week moving average was 440,500, an increase of 19,500 from the previous week's revised average of 421,000.

The top line numbers in today's Employment Situation news release from the BLS showed net job losses in the establishment survey (-62,000), making for a total of 438,000 net jobs (0.32%) lost since the December peak, and the unemployment rate holding steady at 5.5 percent.

With more bad news, we are likely to hear news reports about the unequal burden of the labor market contraction.  I was curious in particular to see how female heads of household were faring.  The BLS reports their unemployment rate on a seasonally unadjusted basis, so the following chart shows 40 years of annual data, measured in June of each year, for all persons (in the civilian noninstitutionalized population) 16 and over, all women 16 and over, and all female heads of household:

A few features of the chart stand out: 

The real-time assessment of whether we are in a recession got nudged a bit more toward "negative" today as the BEA released the preliminary GDP figures. Real GDP is estimated to have grown at a 0.9% annual rate, up from the advance estimate of 0.6% released last month. The explanation of the revisions:

The upward revision to the percent change in real GDP primarily reflected a downward revision to imports and upward revisions to nonresidential structures and to PCE for nondurable goods that were partly offset by downward revisions to private inventory investment, to exports, and to PCE for services.