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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July 28, 2006

Tell Me Something Good

What to make of today's advance report on second quarter economic activity?  When I started writing this post, I had in mind this rather glum summary: slower growth, higher inflation (again).  And then I started reading the reactions of my colleagues in blogville. Brad DeLong referred to the real GDP number as "disappointing." pgl calls the second quarter performance "weak" and correctly notes that the "slowdown in domestic demand growth was across all sectors." At Alpha.Sources blog the reaction was "It sure could look as if the US is finally beginning to lose momentum." Calculated Risk thinks that "overall this is a negative report."

Those were the positive reactions.  Barry Ritholtz offered the view that "The U.S. economy stunk the joint up in Q2, slowing sharply as inflation continued to climb." Nouriel Roubini could barely contain himself, saying the growth number was "awful and dismal."

Wait a minute.  Aren't we going just a little bit overboard here?  After all, we are talking about 2-1/2 percent growth hot on the heels of 5 percent plus. Here's a bit of pretty reasonable perspective, from BizzyBlog: "Not stellar, but given the oil-price situation, I’ll take it." And this, from Jim Hamilton:  "Nevertheless, the 2006:Q1 growth was so strong that it brought the recession probability index down from 7.1% for 2005:Q4 to 3.4% for 2006:Q1, a very favorable reading."

Professor Roubini is having none of it:

... the details of the report are just simply even more awful than the headline number: they are suggesting a coming U.S. recession of the sort that I have been predicting...

Residential housing, of course, is a big part of the story. Michael Shedlock says "Rest assured GDP at 2.5% with housing collapsing and 2.5 trillion dollars worth of ARMS resetting over the next two years is not good news", and if you really need any confirmation that the housing market has cooled you can get it at Econbrowser and at Calculated Risk (here and here).  That and the savingless state of consumers -- duly frowned over by Andrew Samwick and in the first post from Calc. Risk linked above -- raise reasonable doubt about the near-term strength of consumer spending.  But there is nothing new about this.  For some time, the only question has been whether things would slow easy or slow hard.  As CR says, "I suppose [the housing report] shows that the housing slowdown is orderly - so far."

What may be more troubling is Nouriel's claim that

Even non-residential investment is melting down: the headline growth rate of  2.7% growth hides an actual fall in real investment of equipment and software of 1%.

That worries Professor Hamilton too:

Fed Chair Ben Bernanke has expressed hope that

investment in nonresidential structures, which had been weak since 2001, seems to have picked up appreciably, providing some offset to the slower growth in residential construction.

But with nonresidential investment contributing +0.28% to 2006:Q2 and residential investment -0.4%, it seems safe to say that Bernanke's optimism does not find much confirmation in the 2006:Q2 advance estimates.

OK, but yesterday's report on June Manufacturer Shipments, Inventories, and Orders gave reason to be hopeful, and in the slightly longer view there doesn't seem much cause to run for the bunkers:




Look.  I worry as much as the next guy.  I'm even one of the few who are still anxious about the inverted yield curve. But we sure seem to be working ourselves into a pretty good lather over one quarter of 2-1/2 -- 2-1/2! - percent growth.

In my opinion, the really scary stuff is in the inflation numbers.  In case you missed those details, The Nattering Naybob summarizes:

GDP price deflator index +3.3% for the 3rd straight quarter. Consumer prices including food and energy +4.1% vs prior 2.7%. Core PCE +2.9% annualized, the fastest in 12 years. Consumer prices YOY + 2.3%, the fastest growth since 1995.

Employment Costs: +0.9% vs prior +0.6%
Full Report

Jared Bernstein, via Brad DeLong, points out that real labor compensation, measured by the CPI-inflation-adjusted Employment Cost Index actually fell, so you might argue that labor costs remain contained.  But it is generally nominal ECI growth that forecasters relate to inflation, and the news on that front was not good.  In any event, the inflation picture drawn from the ECI crystal ball is generally pretty murky.  To the extent that we want to rest our fortunes on the forecast that price pressures will cool, we'll have to look elsewhere. And there I'm at a loss. 

UPDATE: voluntaryXchange awards the 2nd-quarter performance a C. Kind of sounds like Mark Thoma's "average".

July 28, 2006 in Data Releases | Permalink


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» Fed Watch: Inflation Concerns Set to Trump the Slowdown? from Economist's View
Tim Duy with a Fed Watch in anticipation of next week's meeting: Inflation Concerns set to Trump the Slowdown?, by Tim Duy: The intensity of disgust for the 2Q06 GDP report – documented excessively at macroblog – caught me somewhat [Read More]

Tracked on Aug 3, 2006 2:51:53 AM


I'm in agreement on the scary stuff being inflation. Core PCE at +2.9% is ugly, and this data was completely ignored by the market. The financial press was all over the GDP moderation, but the inflation news was mostly buried in the last line of back page paragraphs. Perhaps this view was fostered by Bernanke's recent claim that moderation in economic growth would calm inflation. Whatever the source of this view is, it certainly seems very risk prone to me. It seems that there is a bit of collective amnesia afoot, and that most folks have forgotten that there is something called stagflation. Does a core number of +2.9% really warrant a pause, even with a moderating GDP? I suspect the Fed is going to get its economic slowdown, but there may be more inflation baked into the cake than anyone is anticipating.

Posted by: JS | July 29, 2006 at 08:00 AM

I think we'll see "the really scary stuff" pretty soon. As I see it, our economy is in a deep hole, and if the Fed stops raising ff rates everyone's going to start digging faster. We're here because no one's been responsible; not the Administration, not Congress, not the Fed & not our private financial sector.
This time, we NEED to see our Fed raise ff rates TOO far to remind us that money's more than a commodity, it's a store of value. If the Fed stops now it will reenergize (or reignite if it's smoldering) the rampant risk-taking that hijacked our economy. From profligate Gov't. deficit spending to unmonitored hedge fund leveraging to no-down, no-doc., cash-back, pick-a-payment real estate lending, the pendulum has swung recklessly far.
The Fed's job is NOT to see that we never again endure two successive quarters of declining growth, it's to see we follow a path likely to produce a sound economy growing at a sustainable rate. Without a recession, how are we to rectify housing prices that have doubled & in some cases tripled in 10 years with wages that have been close to stagnant for 20 years? It's clear, we just can't do it.
Until BB convinces our markets his Fed will NOT honor the Greenspan put, until he convinces the oil cartel he will no longer tolerate its antics, until he tells Congress it's their mess he must now deal with & deal with it he will, until he ACTS (not just talks) to encourage personal saving over spending, his Fed will be treated as a continuation of AG's - a puppet for powerful, but extremely nearsighted interest groups.
I recognize this is a tall order, but it's his job.

Posted by: bailey | July 29, 2006 at 09:33 AM

You may be right in focusing on average growth rates rather than the quarter by quarter noise. Of course, the Bush cheerleaders do focus on the noise when it's above tthe average. Let's see - average real GDP for the 2nd half of the 20th century was 3.5% per year. What's it been over the past 5.5 years?

Posted by: pgl | July 29, 2006 at 04:58 PM

I should have been clearer -- 2.5% stunk the joint up relative to consensus expectations of 3.2%. That's a pretty big percentage miss.

That, plus the decaying grwoth rate and obviously cooling housing market mean that the slow motion slow down is continuing . . .

Posted by: Barry Ritholtz | July 29, 2006 at 05:12 PM

The inflationary push seems to be coming from speculation in the futures market.

Why does the Fed have to raise rates on 300 million to stop 20 banks and hedge funds from driving the price of everything out of sight ?

Why don't we raise the margin requirements in the futures market to a level that shakes the speculators out ?

Posted by: zink | July 30, 2006 at 04:56 PM

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