Ken Rogoff Puzzles Paul Krugman
The "Bush Boom"

Sectoral Rotation Continues

The Federal Reserve's goal of letting the fall in the value of the dollar boost net exports as fast as construction shrinks appears to be working, and to be keeping us from falling even further below full employment.

Dean Baker reads the BEA release:

CEPR - Soaring Net Exports Lead to 1.9 Percent Growth in Second Quarter: Exports grew at a 9.2 percent annual rate. More importantly, imports fell at a 6.6 percent annual rate. Together, the change in net exports added 2.42 percentage points to GDP growth for the quarter, keeping the growth rate in positive territory.

The impact of the foreign sector on the economy in the last three quarters has been extraordinary. Gross domestic purchases, the sum of consumption, investment, and government expenditures, have actually been falling at a 0.5 percent annual rate since the third quarter of 2007. In other words, without the improvement in the trade balance, the economy clearly would be in a recession....

[R]evisions knocked 0.1 percentage points off [estimated] growth [on the output side] in the years from 2004-2007. This makes the productivity slowdown somewhat more striking, with growth averaging just 1.7 percent since the second quarter of 2004. Profits were revised higher for all three years. This has the effect of increasing the statistical discrepancy (the gap between output side GDP and income side GDP), with the -1.2 percent of GDP discrepancy shown for 2006 being one of the largest income side gaps on record.  

While the stimulus package helped to sustain growth in the second quarter and will continue to provide a boost in the third quarter, the economy still faces serious problems ahead. It is unlikely that net exports will continue to provide as strong a boost to demand as they have over the last three quarters.... [N]on-residential construction will soon fall also. Most importantly, the loss of housing wealth will start to slow consumption.