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.
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…