2014q4 GDP: On trend if you measure it “right” with no inflationary pressures in sight.

January 30th, 2015 at 10:07 am

Real GDP grew 2.6% in Q4 last year, slightly below expectations for 3% and slower than the past two quarters which averaged 4.8%. But while that slower pace–at least in today’s advanced report; we’ll see two updates based on more complete data in coming weeks–may cause some angst to some, OTEers know better.

The annualized quarterly rates are jumpy and the best way to smooth out the noise is to look at year-over-year growth, in this case 2013q4 to 2014q4. The figure below plots both measures and as you can see, the smoother, yr/yr series cuts nicely through the noisier one. The US economy’s been growing between 2-3% for a few years, closer to 2% back in 2012 and 2013, and north of that since.


Source: BEA

A few thoughts/comments on the report:

–The growth in GDP deflator over the quarter was zero! Obviously, that’s energy, but when was the last time nominal GDP growth was the same as real?!

–Taking food and energy out of the consumer deflator, and thus looking at the Fed’s preferred measure–the core PCE–we find a quarterly growth rate, annualized, of a measly 1.1%, almost a point below the Fed’s 2% target. The preferred smoother, yr/yr measure, is up 1.4%, also a big miss off the target.

–On a yr/yr basis, inflation has been below the Fed’s target every quarter since 2012q1.

–As exports slowed and imports increased, the trade deficit took a point off of the growth rate, reversing last quarter’s addition of about 0.8. It’s just one quarter, but it’s consistent with a potential longer-term drag from slowing growth in our trading partners and the much stronger dollar. The latter is a particular concern of mine, though I should note: having written critically about currency management in recent weeks, what’s pushing up the dollar today is largely the difference in relative growth rates across countries and demand management by central banks, i.e., not the purchase of dollar reserves by competitors trying to depreciate their own currencies.

So, a punchline here is the same one I raised after the Fed meeting this week. As per the smooth line above, the recovery appears to be solidly on track yet inflationary pressures are nowhere to be seen. If there are threats to the growth outlook, they seem to be on the downside (global slowing, less competitive dollar).

This all points solidly to a patient Fed that should if anything be getting increasingly patient. And yet, I continue to hear impatience creeping into the discussion…

Fed in an interesting zone: strong growth, weak inflation

January 28th, 2015 at 5:54 pm

You’re hanging out at a party with your spouse. He’s a charming guy, life of the party, but he’s been known to get embarrassingly drunk and start breaking things. You watch him closely, observing that he’s drinking heavily as usual and you’re getting ready to shove in the car before things get ugly. But weirdly, they don’t. He’s knocking back the booze but increasingly coherent, funny, and engaging. What should you do?

OK, perhaps not the best analogy but that’s the dilemma facing the Fed, whose FOMC released their statement this afternoon, pledging patience on the rate liftoff, even as growth accelerates. Why the patience? Because price growth is low–consistently below their 2% target–and is “anticipated to decline further in the near term” before gradually rising back up to 2%.

My favorite way to look at the statement is through the WSJ’s Fed Statement Tracker, which shows the words they changed from the last statement (given that some of my papers did double duty back in the old college days, I glad my profs didn’t have one of these). The tracker shows tweaks of “moderate” to “solid” and “solid” to “strong” as well as an added hat tip, though a slight one, to international weakness.

Will any of this fundamentally change the liftoff forecast from the middle of this year to later on? According to the NYT, ‘”Morgan Stanley [analysts] predicted Monday that the Fed will not raise rates until 2016: “We believe the FOMC would risk entrenching inflation expectations at levels inconsistent with its 2 percent goal if it were to push forward with rate hikes as early as June.”’

That’s an interesting and plausible take. As I’ve written elsewhere, based on recent price and wage dynamics, they may also need to mark down their NAIRU (their 5.4% estimate of the lowest unemployment rate consistent with stable inflation).

The big story in Fed watching if you ask me is what if the party gets going and everyone remains well-behaved? Then you don’t need to be so quick to take away the punch bowl. Right?

The 529 microcosm: a revealing political train wreck re an inefficient tax break

January 28th, 2015 at 3:28 pm

This little train wreck over the White House’s proposal and then retraction of a plan to cut back on a wasteful yet beloved tax benefit is highly instructive. It’s a clear example of how much hot air there is in these fiscal debates, where policy makers and pundits scold everyone within earshot of the need for “fiscal responsibility,” then punt when they’ve got a chance to actually…you know…do something responsible.

The benefit in question is the 529 college savings plan, a tax break that allows people to save as much as they want without paying tax on either accruals or withdrawals (the accounts must be used to pay for college). It turns out that 70 percent of the benefits of 529s go to the top 5 percent of households—those with incomes above $200,000. The problem with that, as higher education scholar Sandy Baum recently noted, is that “[529s] primarily provide a subsidy to people who would save in other forms anyway.”

So the WH, to their credit, proposed to tax withdrawals from the plans (accruals would remain untaxed) while significantly boosting better targeted measures to help lower-income households afford college (the 529 change was to be grandfathered in, i.e., applied solely to new plans).

For their efforts, they were quickly and roundly attacked by defenders of the 529s from both sides of the aisle. That’s not too surprising, given that pretty much everybody thinks of themselves as middle class, worries about college tuition, and doesn’t think much at all about the fiscal waste engendered by subsidizing savings that they’d (i.e., “we’d”—I’ve got a couple of these accounts myself!) likely undertake anyway.

But the next step did surprise and take me aback. The White House punted: “Given it has become such a distraction, we’re not going to ask Congress to pass the 529 provision so that they can instead focus on delivering a larger package of education tax relief that has bipartisan support, as well as the president’s broader package of tax relief for child care and working families,” an official said.

One can understand their lurch. The proposal wasn’t going to be legislated anyway, so why get smacked around for nothing?

But I still think they made a mistake. There is no tax break that nobody likes…one you can cut back and everyone says, “good choice, WH…well played!” Meanwhile, if all our politics allows is to introduce new tax breaks while none of the old ones can ever be revoked, we’re in deeper fiscal doo-doo than even I thought. Given this train wreck over a 529 rollback that was going to raise a mere $1 billion over 10 years, it’s awfully hard to take seriously the notion that we’re somehow poised for a big push on tax reform.

At least the WH might have said, “OK, we hear you. Families below $300,000 (or something) can still make tax free withdrawals.” Granted, you won’t have raised much for the Treasury, but at least it’s a hat-tip toward better policy.

There’s a sweet spot in this work where good policy is good politics. It’s easy to advocate for that sort of thing (I’d put work/family balance ideas in that space, e.g.). What separates the wheat from the chaff is when you stand up for good policy that’s tough politics.