North American GDP Contracted Last Quarter

May 29, 2015

U.S. and Canadian real GDP declined at similar annualized rates of 0.7% and 0.6% in the first quarter.  Those were the first contractions in four quarters in the U.S. instance and in 19 quarters in Canada’s case.  U.S. nominal GDP fell 0.9%, and the personal consumption price deflator registered an on-year uptick of only 0.3%, down from 1.1% in the year to 1Q14 and 1.4% in the year to 2Q15.

U.S. real GDP grew at a mere 0.7% annualized over the six months between 3Q14 and 1Q15.  While personal consumption accounted for 2.1 percentage points (ppts) of GDP growth in the last half year, net exports and government expenditures exerted a combined drag of 1.75 ppts.  Inventories, residential investment, and business non-residential spending each lent small upward support to GDP growth, combining for 0.4 ppts.

Canada’s contraction followed positive growth of 2.2% annualized in the fourth quarter and 3.2% in the third quarter of 2014.  The monthly measure of Canadian GDP fell 0.2% in January and March, flanking a 0.1% drop in February. 

The on-year increases of U.S. and Canadian GDP were similar last quarter at 2.7% and 2.4%.  These gains exceed the rate of potential GDP, but the momentum as attested by examining only the past six months lies below the non-inflationary growth speed limits.  It should be noted, too, that reported U.S. GDP growth far overstates the rise in overall economic well-being according to empirical work by the Boston Consulting Group that looks at several other measures, too.  Taking these factors into consideration, U.S. well-being improved at a rate of just 0.5% per year between 2006 and 2013, and over fifteen other countries performed better than the United States, which lagged especially in areas such as income equality and infrastructure.

The big question since the Federal Reserve, Bank of Canada and a slew of other central banks cut short-term interest rates to zero or nearly so has been whether a time would ever come when the advanced economies could handle positive interest rates of a couple of percentage points again without dipping into renewed recession.  The answer to that question remains uncertain.  Economic growth continues to sputter along at a pace well below the old normal in spite of very loose monetary policies.  Another policy approach to achieving escape velocity might have been to run very stimulative fiscal polices, which was the advised course that Keynes produced in the 1930s, but governments everywhere have instead prioritized deficit reduction, relegating easy money policies to a task that it is not optimally equipped to handle.

How much harm, proponents of higher U.S. interest rates both within and outside the Fed, keep asking?  The point, however, is that it’s not about a mere 25 basis points.  By shifting to a tightening bias, the Fed puts upward pressure on the dollar and long-term interest rates, and these levers account for the biggest shift in U.S. monetary conditions.  Some the shift already has occurred, and more lies ahead as the Fed tests the waters to see if the U.S. economy can tolerate a more normalized monetary stance.

Copyright 2015, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission. 

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