Nowcast

GDP: One size no longer fits all

Even the most casual reader of financial and economic news knows that the speed of economic growth matters. Businesses―manufacturers, service providers, and retailers, among others―need to know so that they can decide how much to invest in new production facilities, how many people to employ, and what to stock on their shelves. Fiscal policymakers need to know so that they can estimate government revenue and expenditure. And monetary policymakers need to know so that they can adjust their policies in an effort to ensure low, stable inflation and strong, stable, and balance growth.

But, does it make sense for all of these people―firms, households and governments―to focus on fresh estimates of GDP? How much attention should we pay to any new number? That is, when the U.S. Bureau of Economic Analysis (BEA) announces that their initial estimate of growth for the quarter just ended is 2% or 3% or (as it was last week) 4%, what should we think?

While GDP was once a key cyclical indicator, its value has declined substantially. In this post, we highlight three reasons: timeliness, seasonal adjustment and revisions. Not surprisingly, in the era of big data, those who need information on growth are increasingly turning to more timely indicators customized to their needs….

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Inflation Policy

Inflation in the United States remains at levels that most people don’t really notice. Overall, the consumer price index rose 2.8 percent from May 2017 to May 2018. And, when you look at core measures, the trend is still below 2 percent.

With inflation and inflation expectations still so benign, it is no wonder that despite solid economic growth and the lowest unemployment rate in 50 years the Federal Open Market Committee continues to act quite gradually (see their June 2018 statement). Inflation could well turn up in the near term—perhaps by more than the policymakers expect. But, for reasons that we will explain, if we were on the FOMC, we would stay the planned course: remain vigilant, but certainly not panic.

We start with a look at the data. What we see is that trend inflation has stayed reasonably close to the Fed’s medium-term target of 2 percent for the past two decades. There have been occasional deviations, like the temporary rise in 2008 and again in 2011, but overall, the path is remarkably stable….

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