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…

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

  1. Kevin Rica says:


    You are very correct that cyclical issues overseas are responsible for a deterioration of the US trade balance. See todays WSJ:


    However, when the US economy tanked in 2007-08, our recovery was slowed because other countries manipulated their currencies so that they would not have to accept their share of the adjustment: Heads they win, tails we lose.

    Even though our deficit has declined from its peak, the baseline US trade deficit is still higher because of currency manipulation. The cyclical problems in the rest of the world make it all-the-more imperative that we deal with the currency manipulation problem. This is a bad time to allow others to cheat precisely because the temptation will be greatest for everyone else to manipulate their currencies so that we bear the burden of their adjustment, rather than dealing with the imbalances in their source countries.

    • Jared Bernstein says:

      “so that they would not have to accept their share of the adjustment”–well said, KR.

  2. jay says:

    There can be trade distortion without currency manipulation. Germany has a 7% surplus/gdp without any reserves because of the Euro and its relationship with the Hartz laws. China has a 2 % surplus/gdp. Also, Germany is a fully developed country while China is not. While these trade numbers are different for the US specifically, it’s obvious Germany is causing the largest disruption in the world economy right now in terms of its trade policies. And this affects the US eventually.