Monday, June 14, 2010

Fed's Bullard on the Economy

by Bill McBride on 6/14/2010 11:59:00 PM

I thought these comments by St Louis Fed President James Bullard today were a little odd: The Global Recovery and Monetary Policy

"As of the first quarter of 2010, real GDP stands just shy of the 2008 second quarter level, so that growth of about 1.25 percent would be sufficient to allow real GDP to surpass the previous peak. At that point, the U.S. economy would be fully "recovered" from the very sharp downturn of late 2008 and early 2009."
Fully recovered? Tell that to the millions of unemployed workers.
"To be clear, the 1.25 percent is a quarterly number, and would be 5.0 percent at an annual rate."
Uh, I don't think that is clear. The 1.25% is the level real GDP is currently below the pre-recession peak.

What he meant is it would take an annualized quarterly growth rate of about 5% in Q2 to raise real GDP the 1.25% needed to reach the previous peak.
Although I think that 5.0 percent at an annual rate is too much to expect for current quarter real GDP growth, it seems like a reasonable possibility over the next two quarters combined.
What he means is he thinks there is "a reasonable possibility" that the economy will grow at an annualized rate of 2.5% over the six months period including Q2 and Q3. That is possible, but I'll take the under.
Given these conditions, I expect the U.S. recovery in GDP to be complete in the third quarter of this year.
This is overlooking the weakness in Gross Domestic Income. There are really two measures of GDP: 1) real GDP, and 2) real Gross Domestic Income (GDI). The two measures are conceptually identical, but yield slightly different results.

Recent research suggests that GDI is often more accurate than GDP, especially when the economy is weak. From Fed economist Jeremy Nalewaik, “Income and Product Side Estimates of US Output Growth,” Brookings Papers on Economic Activity.:
Considerable evidence suggests that the growth rates of GDP(I) better represent the business cycle fluctuations in true output growth than do the growth rates of GDP(E). ... These results strongly suggest that economists and statisticians interested in business cycle fluctuations in U.S. output should pay attention to the income-side estimates, and consider using some sort of weighted average of the income- and expenditure-side estimates in their analyses. The evidence in this paper clearly suggests that the weights should be skewed towards GDP(I) ...
Real GDI is still 2.3% below the previous peak, and if the economy grows at 3% all year, real GDI will not surpass the previous peak until Q1 2011.