Thursday, December 5, 2013

GDP revised upwards calls for tapering soon

Today's revision to third quarter GDP was meaningful, since it boosted both real growth and inflation by meaningful increments. As a result, nominal GDP growth (annualized) for the quarter was 5.6%, up from the previously reported 4.7%. As the chart above shows, nominal GDP growth in the third quarter now looks to be among the strongest in the current business cycle expansion.

If the Fed has been trying hard to boost real and nominal GDP growth and avoid deflation, they are certainly not failing at the task. Since the recovery started (mid-2009), nominal GDP growth has been an annualized 3.9%. Last quarter's growth rate of 4.7% is meaningfully higher, and the trend in the past three quarters has been definitely higher. Real growth since the recovery started has been an annualized 2.3%, and last quarter's growth of 3.5% was substantially better; real growth has also been picking up in recent quarters. Inflation, as measured by the broadest measure available—the GDP deflator—was 1.9% last quarter and has averaged 1.6% since the recovery began.

Yes, the current expansion has been weaker across the board than prior expansions. But not egregiously so. An as I noted in yesterday's post, one of the key factors working to depress growth in recent years has been an unprecedented amount of risk aversion. The Fed can only do so much to counteract that problem. Real GDP growth has been weak because the growth in the number of people working has been weak. Quantitative Easing can't convince businesses to hire more if they are concerned about the future and burdened by onerous new regulations and the highest corporate income tax rate in the developed world.

Tapering doesn't mean that monetary policy will become tighter, since QE was never about printing money. Tapering is of course the first step towards an eventual tightening of policy, but even if the Fed were to start tapering tomorrow, monetary policy would remain extraordinarily accommodative (as measured by the level of real short-term interest rates, which remain decidedly negative) for a long time. Markets are overly concerned about tapering because markets have consistently misunderstood the function of QE, which was not to print money but to satisfy a risk-averse world's demand for risk-free, safe assets.

Now that nominal and real GDP are clearly out of the danger zone, confidence is slowly returning, risk aversion is beginning to decline, and the need for QE is therefore declining. Tapering makes sense, and in the long run it should boost confidence and reinforce the outlook for non-inflationary growth.

If tapering doesn't happen at the FOMC meeting this month, then surely it will by the end of January, which will be Bernanke's last as Fed Chairman.


McKibbinUSA said...
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Jeff said...

So do you and risk before or after the tapering announcement?

Jeff said...

"Add" risk.

Benjamin Cole said...

The experience in Japan suggest the risk is tapering too soon rather than too late...

Inflation remains dead. Scott Grannis says no bubbles, and I agree. Where are the bubbles?

The bubble-hunt is becoming like the inflation-hunt, which was a lot like a snipe-hunt.

If one assumes there is a bubble in real estate, then one assumes the private-sector (at least in commercial real estate) is willing to make overly risky loans on real estate, even so soon after the last bust.

This may be, but I think not.

Aside from that, the long run for real estate in urban areas seems to be up. As nations develop, they become urbanized and have higher incomes. Urban real estate rises inevitably. To try to tamp that down through monetary policy is nuts.

Some inflation in growing economies is inevitable and even a sign of health. If the goal of a central bank is to quash inflation (ala Japan or Europe) then move your money to another economy.

If ever the Fed gains a single mandate to quash inflation, sell everything and go to cash, or move to Thailand or China.