Economic Commentaries

Entries for May 2014

23

In her Congressional testimony Fed Chair Yellen professed optimism that the economy is rebounding from the weakness induced by harsh winter weather. But let’s face some facts. If there were no rebound the economy would be in a full-fledged recession and monetary policy would be under serious critical review. So it is not whether there is a rebound, it is really an issue of the quality and magnitude of the rebound.

First quarter preliminary GDP was reported at 0.1% with inflation running at a 1.4% rate for a nominal growth rate of 1.5%. (Extracting the surge in health care spending and utility outlays, real GDP would have contracted by 1% annually). Leaving aside the distinct possibility of a downward revision to the first quarter report, if inflation holds steady at 1.4% this spring and real growth rebounds to a 3% rate, nominal GDP growth in the first half would be 2.9% or more than 1% below the rise for 2013 and significantly below the Fed’s full year forecast for this year.

So far the spring rebound appears underwhelming. For example, vehicle sales slumped in this year’s first two months, but the selling rate rebounded in March-April as the weather normalized. But the four month average is only 15.7 million or about 4% below the rate in last year’s second half. Similar disappointing performance is evident in housing demand. Indeed builders like Lennar and Hovnanian are finally voicing concern over the weakness of demand, and companies like Trulia and Realogy are now expressing similar concerns.

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