Friday, July 30, 2004

Economic Growth: What does "Patchy" mean?

Apparently, it means this. (MSNBC)

U.S. GDP grew at a modest 3 percent annual pace in spring

The Associated Press
Updated: 11:13 a.m. ET July 30, 2004

WASHINGTON - The U.S. economy grew at an annual rate of just 3 percent in the spring, a dramatic slowdown from the rapid pace of the past year, as consumer spending fell to the weakest rate since the slowdown of 2001, the government reported Friday.

The Commerce Department said that the gross domestic product, the country’s total output of goods and services, slowed sharply in the April-June quarter from a 4.5 percent growth rate in the first three months of the year.

The size of the slowdown caught economists by surprise. Many had been looking for GDP growth to come in around 3.8 percent in the second quarter. Even that would have been a sharp deceleration for an economy that had been growing at a 5.4 percent annual rate through the year ending in March.

It raised the issue of whether the economy, which Federal Reserve Chairman Alan Greenspan said last week had encountered a “soft patch” in June, could be in danger of seeing growth falter even more in coming quarters.

Growth is going down to zero, and if you factored in real inflationary forces it is a negative already. Yet we continue even by the generous standards of the CPI to have negative real interest rates.
In one piece of good news, inflation pressures eased with a key GDP inflation gauge that excludes energy and food rising at an annual rate of just 1.8 percent in the second quarter, down from a 2.1 percent increase in the first quarter.

Despite the fictions of excluding food and energy prices increases, which seem to me not to be transient at all this time around, even by that incredibly generous standard we have real interest rates of -0.55% ... the Fed Funds rate 1.25% minus the CPI excluding food and energy 1.8%. Include those and we have real negative interest rates of close to negative one percent or something like that. This is a situation that cannot but help engender more monetary inflation in the long run, but the slowed economy is presenting a dilemma. In the short term, raising interest rates will slow the economy and generate inflation. Hence why it was critical to attempt to raise interest rates previously while nominal inflation numbers were still low. Now Greenspan and the FOMC are the horns of a dillemma, and this one is of their own making. Whatever their previous excuses the signals this time around were quite clear, but they chose to ignore them.


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