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Thursday, May 14, 2015

Fed Watch: Get Used To It

Tim Duy:

Get Used To It, by Tim Duy: As is well known, second quarter GDP growth is not off to a strong start, at least according to the Atlanta Federal Reserve staff:


If this forecast holds, then the first half of 2015 will be very weak if not flat, slow enough that commentators might be tempted to refer to growth as at "stall speed". But quarterly GDP numbers are fairly volatile. Would two consecutive weak quarters be terribly unexpected, or even suggestive of a troubling undercurrent in the economy? It is somewhat difficult to panic about the GDP numbers just yet, especially in the context of the continuous slide in the forward-looking unemployment claims indicator:


Moreover, should we be surprised by the occasionally GDP number in the context of lower estimate of potential growth? As Calculated Risk likes to say:
Right now, due to demographics, 2% GDP growth is the new 4%.
A simple way to think about this is to look at the confidence interval around the one-step ahead GDP forecast from an AR2 model:


Prior to the Great Depression, it would be very unusual for the confidence interval to include a negative read on GDP outside of a recession. Following the Great Depression, however, the confidence interval around the forecast almost always captures the possibility of a negative outcome. This is likely the consequence of two factors, the downshifting of GDP growth as described by Calculated Risk and an increased GDP growth volatility in the most recent sample.
Bottom Line: We probably need to get used to the occasional negative GDP growth numbers in the context of overall expansion for the US economy. The concept of "stall speed" will need to be revised accordingly.

    Posted by on Thursday, May 14, 2015 at 12:16 PM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (12)


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