The Atlanta Fed's macroblog provides commentary and analysis on economic topics including monetary policy, macroeconomic developments, inflation, labor economics, and financial issues.

Authors for macroblog are Dave Altig, John Robertson, and other Atlanta Fed economists and researchers.

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January 30, 2006

GDP Tanked... And Nobody Cared

The remarkable thing about the [take your pick: lackluster, weak, stinky] fourth quarter GDP report was how little impact it had on market sentiment.  One widely shared explanation is this one, from Forbes:

U.S. stocks ended higher Friday, wrapping up a solid week of gains for the market after strong earnings reports...

The market also received support from a gross domestic product report showing the U.S. economy slowing more than expected in the fourth quarter. The data raised hopes among some investors that the Federal Reserve may end its string of interest-rate hikes sooner rather than later.

If that is really true, then "later" must have extended at least past the March FOMC meeting.  The  probabilities for different FOMC decisions, estimated as always from the market for options on fed funds futures, moved in, let's say, interesting ways.  Phone in tomorrow...



... and feel pretty confident about another 25 basis points in March:



This week we add new estimates for the May meeting.  If you are waiting for a pause, the odds at the moment say see you then:


For the cognoscenti, the May probabilities were estimated using the techniques required for dealing with joint FOMC meetings described in Carlson, Craig, and Melick (2005).  If you are in the group that might care about that, you might be in the group that likes to see the data as well:

Download Imp_pdf_slides_for_blog_012706.ppt

Download implied_pdf_january_012706.xls

Download implied_pdf_march_012706.xls

Download implied_pdf_may_012706.xls

January 30, 2006 in Fed Funds Futures | Permalink


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Tracked on Feb 22, 2006 5:49:43 AM


Maybe by quick Excel work doesn't pass a t- or F-test, but...

Using the PCE spreadsheet you linked, the '97-05 mean error of GDP_Final minus GDP_Advance is 0.22% with a std dev of 0.64%. To get revised back to the Wall Street consensus number of 2.8%, we need a revision (2.8-1.1)/.64 = 2.65 standard deviations!

Even if we get a higher number on 2/28, when the preliminary GDP figure is published, the mean error is just 0.22%.

Even after tracking GDP with the stock market by throwing out the 200Q4-2002Q3 points by saying "yes, we know we're in recession, we don't care about the GDP revisions" only lowers the mean error by 2 bp and standard deviation by 10 bp.

I believe the economy doesn't re-accelerate on its own. So barring a rate *cut* or bigger fiscal stimulus (and maybe Katrina recovery will be just that), the best growth quarters of this recovery are definitively behind us. Recession could be years away, but barring an infiltration of the core PCE by oil price increase gremlins, I expect the yield curve to remain relatively flat.

Posted by: American Bond Investor | January 30, 2006 at 04:22 PM

If autos had held steady Q4, rather than plunging, the GDP number is probably around 3.0 - 3.5%.

If auto rebounds Q1 to equal Q3, will that constitute an inflationary fear?

Posted by: The Nattering Naybob | January 30, 2006 at 11:51 PM

ABI -- It is true, I think, that part of the surprise in the 4th quarter represented a slower Katrina/Rita bounce back that was expected. That has given some a bit of optimism about early next year.

NN -- If we had received the news that GDP expanded at 3.5 percent or so, I doubt anyone would have become overly concerned about inflationary pressures. However, you probably would have heard more about resource utilization pressing at the limits than you are likely to now.

Posted by: Dave Altig | February 02, 2006 at 07:38 AM

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