by Calculated Risk on 8/26/2011 06:15:00 PM

There are really two measures of GDP: 1) real GDP, and 2) real Gross Domestic Income (GDI). The BEA also released Q2 GDI today as part of the second estimate for Q2 GDP. Recent research suggests that early releases of GDI is often more accurate than GDP.

For a discussion on GDI, see from Fed economist Jeremy Nalewaik, “Income and Product Side Estimates of US Output Growth,” Brookings Papers on Economic Activity. An excerpt:

The U.S. produces two conceptually identical official measures of its economic output, currently called Gross Domestic Product (GDP) and Gross Domestic Income (GDI). These two measures have shown markedly different business cycle fluctuations over the past twenty five years, with GDI showing a more-pronounced cycle than GDP. These differences have become particularly glaring over the latest cyclical downturn, which appears considerably worse along several dimensions when looking at GDI. ...

In discussing the information content of these two sets of estimates, the confusion often starts with the nomenclature. GDP can mean either the true output variable of interest, or an estimate of that output variable based on the expenditure approach. Since these are two very different things, using “GDP” for both is confusing. Furthermore, since GDI has a different name than GDP, it may not be initially clear that GDI measures the same concept as GDP, using the equally valid income approach.

The following graph is constructed as a percent of the previous peak in both GDP and GDI. This shows when the indicator has bottomed - and when the indicator has returned to the level of the previous peak. If the indicator is at a new peak, the value is 100%.

Click on graph for larger image in graph gallery.

It appears that GDP bottomed in Q2 2009 and GDI in Q3 2009. Real GDP is still below the pre-recession peak in Q2 2011, but real GDI is finally above the previous peak. Also real GDI increased 2.7% annualized in Q1 (GDP increased only 0.4%), and real GDI increased 1.6% in Q2 (GDP increased 1.0%).

Note: Mark Thoma and Justin Wolfers mentioned this earlier today.

However, by other measures - like real personal income less transfer payments and employment - the economy is still far below the pre-recession peak.

by Calculated Risk on 8/26/2011 02:48:00 PM

Here are some excellent sites for the weekend:
National Hurricane Center

U.S. Navy Storm Site

Weather Underground Note: See Jeff Master's blog

Here is an active discussion board for hurricanes. This includes reports, recon, tracking, etc.

For real time: here is the radar site for Newport/Morehead City, NC.

And StormPulse ht HomeGnome (cool maps)

Stay safe!

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.