therefore, the fact that Q2 only came in at 2.4% vs the 2.6% expected means we had lower than forecasted growth but off a higher base, right? which should be a good thing, right? not so fast!
the last two quarters of 2009 were both revised downwards by 0.6% each; and 3 of the 4 quarters of 2008 were marked down significantly as well, with revisions of -0.9%, -1.3% and -1.4% in Qs 2, 3 & 4, respectively, while Q1 was unchanged
so, we actually had lower-than-projected growth off a lower base; analysts were forecasting that as of June 30, Real GDP would grow to $13,582.8 billion, up 2.6% from the March 31 level of $13,238.6 billion
what we have instead, though, is that Real GDP is now estimated at $13,216.5 billion, which is 2.7% lower than anticipated
as for the details:
inventories contributed about 45% of the Q2 GDP growth (about 1% of the 2.4%), the 4th straight quarter that inventories boosted GDP --- but the inventory adjustment is likely waning
residential investment contributed 1/4 of the Q2 growth (0.6 of the 2.4%) --- but that was boosted by the tax credit, so it would be surprising if it didn't decline in Q3
PCE grew 1.6% in Q2, down from 1.9% in Q1 --- but on a seasonally-adjusted basis, it declined 0.2%, the first time it has fallen since Q1/2009
final sales to domestic purchasers was up just less than 1%
I know, I'm a glass-half-empty guy; I guess the good news is that net exports had a negative contribution of 2.78, as imports grew faster than exports (4.7% vs. 3.7%), so net exports fell 8%; and seeing as that's the largest negative contribution in years, perhaps it will be revised away, or will be offset in Q3 (how's that for glass half-full?)
government expenditures added to GDP, even at the state and local level --- that may be the last hurrah for state/local spending growth; we'll have to see what happens to overall government spending; Jan Hatzius is expecting a drag:
the overall impact of fiscal policy (combining all levels of government) is likely to go from an average of +1.3 percentage points between early 2009 and early 2010 to -1.7 percentage points in 2011, a swing of about -3 percentage points
the ECRI WLI, by the way, fell a bit further, to -10.7, from -10.5
conversely, a few better-than-expected reports were UofM Confidence (67.8), Chicago PMI (62.3) and NAPM-Milwaukee (66)
on to the links:
Seven faces of "the peril". James Bullard, Federal Reserve Bank of St. Louis Review.
executive summary here
Bullard argues that promises to keep the policy rate near zero may be increasing the risk of falling into this state where inflation turns negative and remains there. He argues that promising to remain at zero for a long time is a double-edged sword. This policy is consistent with the idea that inflation and inflation expectations should rise in response to the promise, and that this will eventually lead the economy back toward the targeted equilibrium. But it is also consistent with the idea that inflation and inflation expectations will instead fall, and that the economy will settle in the neighborhood of the unintended steady state, as Japan has in recent years.... The policymaker is completely committed to interest rate adjustment as the main tool of monetary policy, even long after it ceases to make sense.... A better policy response to a negative shock is to expand the quantitative easing program through the purchase of Treasury securities.
Bullard isn't typically as hawkish as Lacker, Hoenig or Plosser; he's more centrist; but he is considered to have more of a hawkish than dovish tilt; in fact, he said so himself:
"I started out saying I was a hawk and I very much see myself in that role. Inflation is very costly for the economy so I’d be very reluctant to let inflation get out of control or do anything that would jeopardize our low and stable inflation rate"
So this is pretty significant that this QE2 argument is coming from a Fed governor with hawkish leanings.
recall that in Bernanke's 2002 speech about making sure deflation doesn't happen here, he recommended that if the Fed funds rate had fallen to zero, the next step would be to lower rates further out the curve, and this could be done in two ways, either by committing to keep the overnight rate at zero for an extended period (which they've done) and/or by "a more direct method, which I [Ben] personally prefer, would be for the Fed to begin announcing explicit ceilings for yields on longer-maturity Treasury debt"; he went on to say:
The most striking episode of bond-price pegging occurred during the years before the Federal Reserve-Treasury Accord of 1951. Prior to that agreement, which freed the Fed from its responsibility to fix yields on government debt, the Fed maintained a ceiling of 2-1/2 percent on long-term Treasury bonds for nearly a decade. Moreover, it simultaneously established a ceiling on the twelve-month Treasury certificate of between 7/8 percent to 1-1/4 percent and, during the first half of that period, a rate of 3/8 percent on the 90-day Treasury bill. The Fed was able to achieve these low interest rates despite a level of outstanding government debt (relative to GDP) significantly greater than we have today, as well as inflation rates substantially more variable.
get ready for new lows in yields!
Inflationistas and deflationistas. Paul Krugman.
Should China dump dollars for commodities? What about the "nuclear option" of dumping Treasuries? Can global trade collapse? Michael Shedlock.
Long-term mutual fund flows. ICI.
Equity funds had estimated outflows of $1.32 billion for the week, compared to
estimated outflows of $3.19 billion in the previous week.
that's the 12th sequential week of outflows; just how is the market going up??
oil spill link of the day:
Federal government covering up severity of oil spill? CNN via naked capitalism.
