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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".
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Fed Watch: Inflation Concerns Set to Trump the Slowdown?
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]
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