US GDP Revised Upwards - Fed Pace Will Remain Measured

Wednesday, June 29, 2005

The Federal Reserve will be able to stay on its path of a measured removal of policy accomodation after the upwardly revised figures for real GDP growth show that the economy is still on a firm footing, as Fed chairman Alan Greenspan had indicated recently. Real GDP was reported at an unchanged growth rate of 3.8 percent by the Bureau of Economic Analysis (pdf) (BEA). This is a tad higher than the market consensus that had estimated a revision to 3.7 percent from the preliminary number of 3.5 percent.

US GDP Q1 05

With the Q1 figure out of the way markets are most likely to focus on the future as it can be taken as given that the FOMC will raise the Fed Funds rate another 25 basis points tomorrow. The speculation on the future rate policy is wide open though.
Record oil prices will probably show up in the next inflation readings, keeping the FOMC's hawks on their toes. On the other hand recent economic data paints a mixed picture of the growth dynamic, excluding any acceleration in the Fed's rate steps.
Seeing it from a European perspective, I can only envy the prevailing strength in the US economy and don't quite understand commentators painting a picture of lacklustre growth. Hey, 3.8 percent is a growth rate Europe would take as a reason to light the fireworks!
The structure of the growth pattern does not look bad either.
Real personal consumption expenditures increased 3.6 percent in the first quarter, compared with an increase of 4.2 percent in the fourth.
The government stepped on the spending brakes as well (save for defense).
Real federal government consumption expenditures and gross investment increased 0.6 percent in the first quarter, compared with an increase of 1.2 percent in the fourth. National defense increased 0.5 percent, in contrast to a decrease of 0.6 percent. Nondefense increased 0.9 percent, compared with an increase of 5.3 percent. Real state and local government consumption expenditures and gross investment decreased 0.1 percent, in contrast to an increase of 0.6 percent.
The trade picture shows a pickup in US activity too.
Real exports of goods and services increased 8.9 percent in the first quarter, compared with an increase of 3.2 percent in the fourth. Real imports of goods and services increased 9.6 percent, compared with an increase of 11.4 percent.
The question remaining is whether the US economy can sustain such growth rates. Most recent economic indicators pointed to a slowdown in most sectors except housing which foots on the still very low longterm rates.

US Yield Curve 290605

Tomorrow's probable announcement of the ninth 25 basis point increase in a row will see the yield curve flattening dramatically. The spread from Fed Funds to 10-year Treasuries will decline to a mere 69 basis points.
SPOTTED BLOG/GLOB/ALLY: Barry Ritholtz has a piece on "Translating Greenspeak into Plain English" by the mysterious Peneboscot Princess who has managed to escape the Googlesphere so far.
Jim Picerno asks whether the dollar really has has legs. I'd say for the moment they are longer than those of the other two ugly ducklings Euro and Yen.
Mark Thoma points to the CBOT 30-day Fed Funds futures which show a 100-percent chance for a 25 basis point increase and a 4-percent chance for a 50 basis point hike.
General Glut criticizes the Fed's hesitation "to take the punch bowl away from these party-goers" in advance.
David Altig showed us already on Monday that the Fed Funds probabilities imply "a lot of volatility around expectations of where we will be come October."
Tim Iacono has a nice roundup of last week's Q&A session of Alan Greenspan at the Senate Finance Committee. Quote #1 (by the Maestro himself) : "If there's a crisis, we'll all get together and solve it - or hopefully solve it." Quote #2 (by Democrat Max Baucus): "I don't see a plan in the United States. I think frankly too much burden is on your shoulders. Too many people in this country think, "well the Fed will take care of it."
If that's not enough preparation for tomorrow, please note my earlier post "FRB's Kohn: When the Unexpected Inevitably Occurs" which is this year's sternest warning from any FOMC member.

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