U.S. GDP Expanding Too Slowly to Pose Major Threat of Inflation

May 30, 2013

Between the first quarter of 2012 and the first quarter of 2013, U.S. real GDP, nominal GDP, and the core personal consumption expenditure price deflator rose by 1.8%, 3.4%, and 1.3%.  Each of these increases was historically low and down from respective advances of 2.4%, 4.4%, and 1.9% in the previous statement year to 1Q12.  Consumer prices increased only 1.1% in the twelve months through April 2013.  The table below, which compares the latest five-year growth rates of real GDP, nominal GDP and consumer price inflation to their pace of increase during the last ten years (1Q13 versus 1Q03) and the prior twenty years between the first quarter of 1983 and the first quarter of 2003, also highlights the disinflationary, rather than inflationary, essential trend of the U.S. economy.

% per year 1Q13 vs 1Q08 1Q13 vs 1Q03 1Q03 vs 1Q83
Real GDP 0.7% 1.7% 3.4%
Nominal GDP 2.3% 3.9% 6.0%
CPI Inflation 1.6% 2.4% 3.2%


The current levels of U.S. employment and capacity usage depict the existence of considerable slack in productive resources, thus corroborating what growth in nominal and real GDP suggest about future inflation staying benign

  • Total capacity usage in April stood at 77.8%.  That’s comfortably below the 80.2% 40-year average.  It’s also not only 6.2 percentage points below the 1994-95 high but even less than the 1990-91 recessionary low. 
  • The average monthly rate of rise in non-farm payroll jobs quickened from 138K in the six months October 2012 to 208K over the ensuing half-year to April of this year.  The 1.56% advance in employment during the year to April was decent, although still not quite as great as the 1.84% average annual increase sustained over the final twenty years of the last century.  The problem is not the slight discrepancy between those rates of jobs growth but rather the grand canyon of a hole in the labor market created over the past dozen years.  Had the 1.84% per annum trendline of jobs growth been followed after end-1999, there would now be 166.5 million U.S. workers, nearly 31 million more than the actual level.

Many analysts are confident that inflation will remain benign in coming years, myself included.  A likelihood of continuing price stability doesn’t preclude an exaggerated spike in bond yields.  At monetary policy turning points in the past, fixed-income securities have proven ultra-sensitive to perceived policy change and yet proven dead wrong on their assessment of the threat of accelerating inflation.  For instance, the 10- and 30-year treasury yields in mid-January 1994 were at 5.58% and 6.20%.  In a year’s time to end-January 1995, the federal funds rate doubled to 6.0%, though just 175 basis points of that increase had been implemented by early November when Treasury yields peaked some 245 bps above their January low on the 10-year security and 197 bps above it on the 30-year bond.  All that time, actual inflation barely moved, rising just 0.2 percentage points to 2.7%.  With the benefit of 20-20 hindsight, it can be now seen that the U.S. was in a multi-decade deceleration of inflation at the time of this period of high market volatility, and the economy nearly sank into recession as a result.  From GDP growth in the second half of 1994, the U.S. economy slowed abruptly to a 0.9% pace in the first half of 1995.

Over the past month, the 10-year and 30-year treasury yields have risen by 45 and 40 basis points even though all that is at stake is a whiff of a possible decline in quantitative easing.  The Fed continues not to expect the fed funds rate to begin climbing from its present 0-0.25% range until 2015.  But at 2.13% and 3.29%, the yields are presently 65 and 48 basis points below their 5-year averages.  It would seem that additional scope exists for bond prices to fall and yields to rise, and the 2.25% 10-year level has been identified as a threshold beyond which bond selling could pick up.  Monetary policymaking is an art, not a science, and times like these require the touch of an artist’s hand at the policy tiller if central banks are to avoid jeopardizing their long-term goals.

Copyright 2013, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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