Our steady macro economy and what it means for the Fed

October 30th, 2014 at 1:42 pm

The US economy expanded at a nice clip of 3.5% in the third quarter, according to this AM’s report from the BEA. That’s their advance guesstimate based on incomplete data so future revisions may wiggle about some, but it’s pretty consistent with what we expected.

It’s also an annualized quarterly rate, whereas my readers know I prefer to pull out something closer to the underlying trend by taking year-over-year changes (e.g., 20013q3-2014q3). That’s what I do in the figure below, and I’ve added in core inflation, payroll employment growth, as well as the unemployment rate.

Yes, starting in around 2010 it’s a boring picture. That’s the point.

Real GDP’s been bumping around the 2% line, up 2.3% over the past year and tracking a bit faster at 2.5% averaging over the last two quarters. So maybe a smidgen of acceleration there.

Payrolls have been hugging that 2% line on a year-over-year basis. The jobless rate’s been sliding down, and while its initial descent was driven in no small part by discouraged job seekers giving up the search—and thus not counted among the unemployed—lately it has been falling for the right reason: more job seekers finding work.

Inflation—and I’m using the core PCE, since that’s the Fed’s preferred gauge for price pressures—has been running consistently below their 2% target. The most recent observation from today’s release is 1.5% and averaging these yearly changes over the past two years gets you a paltry 1.4%, with little variance. Inflation expectations remain well-anchored under 2% as well.

In other words, you can make this as complicated as you want, get all wound up in the impacts of the end of the Fed’s monthly asset buys, Europe’s slow down, the emerging markets, or “whatevs” as the kids say. But there’s a lot of momentum in these trends and my expectation is that the steady recovery remains on track.

That’s not the express track, to be sure. We never had the needed bounce-back after the Great Recession and we settled into trend growth before repairing enough of the damage. There’s still a lot of slack in the job market and that’s why most households’ real wages and incomes have been pretty flat.

So I’m definitely not saying all’s well. Instead my point is that it will take a lot more quarters and years of this slow and steady improvement to squeeze the remaining slack out of the job market and get back to full employment. And only then do I expect to see many more people benefiting from the growth you see in the chart.

That means the Fed needs to continue to support the economy through very low rates and the big balance sheet they’ve built up (i.e., with QE over, they won’t be adding to it, but neither do they need to unwind it yet).

Or to put it slightly differently, if that inflation line looks scary, volatile, or threatening to you, go get your eyes checked.


Sources: BEA, BLS





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4 comments in reply to "Our steady macro economy and what it means for the Fed"

  1. Jonas says:


    Jared, did I just see you walking by the BLS (Thursday afternoon)?

  2. Peter K. says:

    Imagine if we didn’t have all of that fiscal austerity which the CBO estimates shaved 1.5 percent off of growth through the end of the year. Imagine if we had a “competitve” dollar or no taper. I don’t really buy the talk of the Secstags. It’s all been policy fail and politics.

  3. Robert Bostick says:

    A couple of things stand out for either revision or reversal next quarter.

    One is the increase in govt. spending and the other the increase in net exports.
    Together they added about 2% to yesterday’s q3 GDP release. So excluding
    those two suspect numbers q3 would have been reported as up only 1.5%. (Mosler)