Economics, Monetary Policy, U.S. Economy

Time to forget about 3% US growth

Image Credit: jaci starkey (Flickr) CC

Image Credit: jaci starkey (Flickr) CC

The third estimate of the first quarter GDP growth rate, based on “more complete source data,” according to the Commerce Department, was reported June 25th to be minus 2.9%. Current dollar GDP also fell at a 1.7% percent pace. That’s a “Japan-Lost-Decade” style number. Q1 prices rose at a tepid 1.3% pace.

These are extraordinarily weak numbers, especially given two facts. Early this year confident predictions abounded of 3-4% growth in 2014. Right up to the initial release of the Q1 growth rate at 0.1% forecasters had been calling for 2-3% growth. Now, on the third try, the Commerce Department is telling us the the economy shrank during Q1 at a dismaying 2.9% pace.

The Fed has uttered not a word about the very weak GDP numbers and their implications for its rosy prediction of 3% growth. Nor has it said anything about possible changes in Fed policy aimed at sustaining growth. The Fed Chairman, Janet Yellen, chose instead to look ahead to a growth rebound based on stronger growth of consumption and investment. The Fed’s only policy option, if it can be called that, is to talk about further delaying the first rate increase in interest rates that it mandates. Markets have set that date at about mid-2015. No doubt it will slip further to early 2016 given the weakness of the US economy.

There is one good result that might come from the very weak economic numbers being reported. The silly blather about rising inflation that intensified in June as headline CPI inflation reached a year over year pace of 2.1 % may end. Most of the modest rise in inflation is due to negative supply shocks: drought that has boosted food prices and rising Middle East tension that has boosted energy prices. The Fed doesn’t respond to higher inflation tied to negative supply shocks because any Fed tightening, a negative demand shock, would result in a collapse of output and employment. That lesson was learned the hard way during 1974-75 when central banks boosted interest rates in response to the jump in inflation caused by a jump in energy prices.

The US economy is weak and there isn’t much left in the Fed’s tool kit beyond a shift away from talking about when it will exit from zero interest rates to things it could do–like buying a wider range of assets–to at least sustain modest growth.

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2 thoughts on “Time to forget about 3% US growth

  1. Agreed.

    Sadly, the Fed has all but committed to tapering down, despite evidence it should actually taper up. So now, if the Fed begins to taper up, the inflation-hysterics will scream about flip-flopping, lack of resolve and direction, bad guidance etc.

    QE has not really led to inflation in either Japan or the USA, but it has been coincident to improved growth.

    When near the ZLB, QE is the central bankers’ only real tool (well, maybe lowering or raising IOER).

    in ZLB-land, the Fed cannot low interest rate below zero, nor can raising rates (tightening money) do anything but lower rate expectations in the long run. Remember what Milton Friedman said, “Low rates are a sign money has been tight.”

    So when at ZLB, more tightening has the perverse effect of lowering long-term rate expectations. You cannot forever tighten your way to higher interest rates!

    Add on, the globe has a capital glut.

    The Fed should be doing QE hard and heavy. The Fed should shoot for back-to-back years of real GDP growth in the 4 percent range.

  2. Once again, looking to the overly self impressed to fix our problems.
    Some quick solutions:
    1) Repeal the 16th Amendment, get rid of the IRS, collect the taxes needed to run our government by implementing a national consumption tax.
    2) Sunset Obamacare, and introduce a real solution to our health care needs that is in the hands – and the responsibility of – the individual.
    3) Tie our monetary unit to something of value.
    4) Get out of the way, let the free market roll.

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