U.S. GDP Getting Better All the Time?

September 26, 2014

The third estimate of real GDP growth in the second quarter was 4.6%, up from 4.0% reported initially and 4.2% in the first revision.  There were upward revisions to non-residential and residential investment, government expenditures, exports and imports.  Inventory building lifted growth by 1.42 percentage points (ppts), up from 1.39 ppts estimated a month ago.  This was the third quarter in the last four in which GDP expanded at a 3.5% annualized rate or better.  4.6% was the strongest quarter-on-quarter advance since 4Q11, and a 6.8% annualized rise in nominal GDP was the most since the first quarter of 2006.

Examination of the trend in on-year growth casts some doubt on the above facts that appear to highlight an economy whose growth may be accelerating too rapidly.  In the year to 2Q14, real GDP grew 2.6%, only slightly out of line from the increases of 1.8% in the year to 2Q13, 2.3% in the year to 2Q12 and 1.7% in the year to 2Q11.  One drag came from housing, which advanced just 1.2% over the past four quarters, down sharply from 15.2% in the year to 2Q13 and 12.1% in the year to 2Q12.  Between 2Q13 and 2Q14, exports increased just 3.9% and was neutralized by a 3.8% rise in imports, while government spending fell by 0.7%.  Personal consumption advanced 2.4%, similar to the 2.3% increase in the previous four quarters.  The main improvement involved non-residential investment’s rise of 6.8% versus 1.9% in the previous year, but the latest four-quarter increase was below that of 9.6% in the year to 2Q12 and not very different from a rise of 6.1% in the year to 2Q11. 

The Fed’s preferred measures of inflation, the total and core personal consumption price deflator (PCE) remain south of the 2% target.  The total PCE deflator rose 1.6% in the last statement year after 1.1% in the year to 2Q13, 1.7% in the year to 2Q12 and 2.6% in the year to 2Q11, while the core PCE deflator showed less acceleration, rising by 1.5% in the year to 2Q14 versus 1.3% in the year to 2Q13, 1.9% in the year to 2Q12, and 1.4% in the year to 2Q11.  Some analysts argue that the price deflator level should by targeted rather than its rate of change.  In order to offset the cumulative 1.9% shortfall in growth of the core PCE deflator from target over the past four years, the core PCE deflator ought to be allowed to climb at an average pace of 2.5% per year over the next four years, those analysts believe.  With indicators of expected medium-term inflation receding rather than accelerating, interest rate normalization by the Fed hardly seems to be an urgent matter. 

Copyright 2014, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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