by Calculated Risk on 8/26/2011 11:04:00 AM

Fed Chairman Ben Bernanke made several key points in his speech today:

• Economic growth has been very disappointing, but the FOMC expects growth to pickup in the 2nd half. Bernanke believes some, but not all, of the weakness this year is due to specific events:

Temporary factors, including the effects of the run-up in commodity prices on consumer and business budgets and the effect of the Japanese disaster on global supply chains and production, were part of the reason for the weak performance of the economy in the first half of 2011; accordingly, growth in the second half looks likely to improve as their influence recedes. However, the incoming data suggest that other, more persistent factors also have been at work.

Bernanke also mentioned additional situations and events:

[C]oncerns about both European sovereign debts and ... the controversy concerning the raising of the U.S. federal debt ceiling.

• Although Bernanke didn't outline additional policy choices, as he did in his speech last year, he highlighted the next meeting of the FOMC if growth doesn't improve:

[T]he Federal Reserve has a range of tools that could be used to provide additional monetary stimulus. We discussed the relative merits and costs of such tools at our August meeting. We will continue to consider those and other pertinent issues, including of course economic and financial developments, at our meeting in September, which has been scheduled for two days (the 20th and the 21st) instead of one to allow a fuller discussion. The Committee will continue to assess the economic outlook in light of incoming information and is prepared to employ its tools as appropriate to promote a stronger economic recovery in a context of price stability.

• Bernanke argued that the economy will be fine in the long run, but more fiscal stimulus is needed in the short run:

Notwithstanding the severe difficulties we currently face, I do not expect the long-run growth potential of the U.S. economy to be materially affected by the crisis and the recession if--and I stress if--our country takes the necessary steps to secure that outcome.
...
Normally, monetary or fiscal policies aimed primarily at promoting a faster pace of economic recovery in the near term would not be expected to significantly affect the longer-term performance of the economy. However, current circumstances may be an exception to that standard view--the exception to which I alluded earlier. Our economy is suffering today from an extraordinarily high level of long-term unemployment, with nearly half of the unemployed having been out of work for more than six months. Under these unusual circumstances, policies that promote a stronger recovery in the near term may serve longer-term objectives as well. In the short term, putting people back to work reduces the hardships inflicted by difficult economic times and helps ensure that our economy is producing at its full potential rather than leaving productive resources fallow. In the longer term, minimizing the duration of unemployment supports a healthy economy by avoiding some of the erosion of skills and loss of attachment to the labor force that is often associated with long-term unemployment.

Notwithstanding this observation, which adds urgency to the need to achieve a cyclical recovery in employment, most of the economic policies that support robust economic growth in the long run are outside the province of the central bank.
...
Although the issue of fiscal sustainability must urgently be addressed, fiscal policymakers should not, as a consequence, disregard the fragility of the current economic recovery. Fortunately, the two goals of achieving fiscal sustainability--which is the result of responsible policies set in place for the longer term--and avoiding the creation of fiscal headwinds for the current recovery are not incompatible.

• In summary: On monetary policy, the FOMC will consider further monetary easing at the September meeting based on incoming data. There are only a few major economic releases before the next FOMC meeting (August employment, retail sales and CPI), and there are also some high frequency reports that the Fed might watch to see if there is a pickup after the debt ceiling economic freeze (like the Empire State and Philly Fed manufacturing surveys for September). If there is no pickup in activity - and CPI is benign - the FOMC is prepared to act.

Bernanke is arguing strongly for more fiscal stimulus in the short term aimed at helping the unemployed - combined with a long term plan to bring U.S. fiscal policy on a sustainable path. Politically he couldn't argue any stronger for more short term fiscal stimulus.

by Calculated Risk on 8/26/2011 10:04:00 AM

From Fed Chairman Ben Bernanke: The Near- and Longer-Term Prospects for the U.S. Economy

Monetary policy must be responsive to changes in the economy and, in particular, to the outlook for growth and inflation. As I mentioned earlier, the recent data have indicated that economic growth during the first half of this year was considerably slower than the Federal Open Market Committee had been expecting, and that temporary factors can account for only a portion of the economic weakness that we have observed. Consequently, although we expect a moderate recovery to continue and indeed to strengthen over time, the Committee has marked down its outlook for the likely pace of growth over coming quarters. With commodity prices and other import prices moderating and with longer-term inflation expectations remaining stable, we expect inflation to settle, over coming quarters, at levels at or below the rate of 2 percent, or a bit less, that most Committee participants view as being consistent with our dual mandate.

In light of its current outlook, the Committee recently decided to provide more specific forward guidance about its expectations for the future path of the federal funds rate. In particular, in the statement following our meeting earlier this month, we indicated that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013. That is, in what the Committee judges to be the most likely scenarios for resource utilization and inflation in the medium term, the target for the federal funds rate would be held at its current low levels for at least two more years.

In addition to refining our forward guidance, the Federal Reserve has a range of tools that could be used to provide additional monetary stimulus. We discussed the relative merits and costs of such tools at our August meeting. We will continue to consider those and other pertinent issues, including of course economic and financial developments, at our meeting in September, which has been scheduled for two days (the 20th and the 21st) instead of one to allow a fuller discussion. The Committee will continue to assess the economic outlook in light of incoming information and is prepared to employ its tools as appropriate to promote a stronger economic recovery in a context of price stability.

by Calculated Risk on 8/26/2011 09:55:00 AM

The final August Reuters / University of Michigan consumer sentiment index increased slightly to 55.7 from the preliminary reading of 54.9. This is down sharply from 63.7 in July.


Click on graph for larger image in graphic gallery.

In general consumer sentiment is a coincident indicator and is usually impacted by employment (and the unemployment rate) and gasoline prices. I think consumer sentiment declined sharply in August because of the heavy coverage of the debt ceiling debate.

This was slightly below the consensus forecast of 56.0.

by Calculated Risk on 8/26/2011 08:30:00 AM

From the BEA: Gross Domestic Product, Second Quarter 2011 (second estimate

Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 1.0 percent in the second quarter of 2011, (that is, from the first quarter to the second quarter), according to the "second" estimate released by the Bureau of Economic Analysis.

This was revised down from 1.3% and slightly below the consensus of 1.1%.

Exports subtracted more from GDP - as did changes in private inventories. Consumption of services and fixed investment were revised up slightly.

The following graph shows the quarterly GDP growth (at an annual rate) for the last 30 years. The current quarter is in blue.

Click on graph for larger image in graph gallery.

The dashed line is the current growth rate. Growth in Q2 at 1.0% annualized was below trend growth (around 3%) - and very weak for a recovery, especially with all the slack in the system.

Here is a table of the changes (contribution to GDP):

Contributions to Percent Change in Q2 Real Gross Domestic Product
	2nd Estimate	Advance	Change
Percent change at annual rate:
Gross domestic product	1.0	1.3	-0.3
Percentage points at annual rates:
Personal consumption expenditures	0.3	0.07	0.23
Goods	-0.34	-0.33	-0.01
Durable goods	-0.4	-0.35	-0.05
Nondurable goods	0.07	0.02	0.05
Services	0.64	0.4	0.24
Gross private domestic investment	0.78	0.87	-0.09
Fixed investment	1.01	0.69	0.32
Nonresidential	0.94	0.61	0.33
Structures	0.38	0.2	0.18
Equipment and software	0.55	0.41	0.14
Residential	0.08	0.08	0
Change in private inventories	-0.23	0.18	-0.41
Net exports of goods and services	0.09	0.58	-0.49
Exports	0.41	0.81	-0.4
Imports	-0.33	-0.23	-0.1
Government consumption expenditures	-0.18	-0.23	0.05
Federal	0.16	0.18	-0.02
National defense	0.38	0.39	-0.01
Nondefense	-0.21	-0.21	0
State and local	-0.34	-0.41	0.07

by Calculated Risk on 8/25/2011 09:25:00 PM

The focus tomorrow is on Fed Chairman Bernanke's speech at Jackson Hole, but there will be some economic data too:

8:30 AM: Q2 GDP (second estimate). The first estimate was for 1.3% annualized real growth in Q2. The consensus is for a downward revision to 1.1% GDP growth.

9:55 AM: Reuters/University of Mich Consumer Sentiment final for August. The consensus is for a slight increase to 56.0 from the preliminary August reading of 54.9.

10:00 AM: Fed Chairman Ben Bernanke speaks at the Federal Reserve Bank of Kansas City Economic Symposium, Jackson Hole, Wyoming, "Near- and Long-Term Prospects for the U.S. Economy"

And on Europe:
From the WSJ: Bailout for Greece Falters Over Demand for Collateral. The Greek 2 year bond yield is almost to 46%.

From the Telegraph: Greece forced to tap emergency fund

In a move described as the "last stand for Greek banks", the embattled country's central bank activated Emergency Liquidity Assistance (ELA) for the first time on Wednesday night.

And from Bloomberg: France, Spain, Italy Extend Bans on Short-Selling