The GDP report: An alternative take

Some showed a “positive spirit”:

From CNBC:

Growth last quarter was the quickest since the first quarter of 2015 and followed a 1.2 percent pace in the January-March period. Economists had expected that the second-quarter GDP growth rate would be unrevised at 3.0 percent.

With GDP accelerating in the second quarter, the economy grew 2.1 percent in the first half of 2017. Still, economists believe growth this year will not breach President Donald Trump’s ambitious 3.0 percent target.

The fact is that the economy has been in the doldrums for the past 11 years. The “ambitious” 3% growth was the norm during Greenspan´s last four years at the Fed´s helm. And that´s because he made a mistake in 2001-03, letting aggregate nominal spending (NGD) growth fall too far below trend.

In the 1990s, when the Fed was successful in keeping NGDP growth close to trend, real output growth averaged 3.6%! (Even if you think that´s exceptional, you have to agree that 2.1% is also “exceptional”).

The charts provide an illustration. In the two years before the recession and in the eight years since, real output growth has averaged only about 2.1%.

Why the big difference? Simply because in the two years before the recession, Bernanke allowed NGDP growth to falter, falling below the 5.5% average obtained over the whole of Greenspan´s tenure. Furthermore, for the past eight years, NGDP growth has averaged only 3.2%

If you note that the Fed´s expectation for long-term (or “potential”) real growth is just 1.8%, the economy at 2.1% is growing “too fast” for the Fed´s liking! It´s easy, therefore, to understand much of the FOMC´s (and Yellen´s) insistence in keeping to the “agreed upon” hiking path.


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