GDP and FOMC – Two Reports, One Big Surprise


The Bureau of Economic Analysis (BEA) released the advance estimate of real GDP growth for the second quarter of 2013 and the Federal Open Market Committee (FOMC) concluded its two day meeting with the release of the traditional statement reporting on the committee’s actions. These two reports have been much anticipated as analysts track the pace of the economic recovery and consider the Fed’s reaction to it. The irony has been that a weak economy (bad news) pushes the Fed toward further accommodation (a desirable outcome) while a stronger economy (good news) pushes the Fed to begin winding down asset purchases, reducing accommodation (a less desirable outcome).

Today’s reports surprised more on the GDP news than on the FOMC news.

Real GDP grew at an annual rate of 1.7% in the second quarter, well above earlier expectations of a sharp slowdown following the 1.8% growth rate in the first quarter (prior to revisions). But comprehensive revisions, which the BEA completes generally every five years, revised first quarter growth down to 1.1% (in addition to a host of other updates, see Revisions). So not only didn’t growth slowdown sharply, it accelerated between the first and second quarters. Beyond these two quarters the revisions largely preserved the uneven pattern of recent growth, but lowered growth modestly in the last 3 quarters and raised it in the preceding 4 quarters. Overall, the revisions raised average real GDP growth since the end of the Great Recession (June 2009) to 2.2% from 2.1%.

blog gdp 2013_07

The FOMC confirmed expectations, announcing no major policy shift following its meeting. Asset purchases (QE3) will continue for the time being and any increase in the target for the federal funds rate is still contingent on the unemployment rate dropping to or below 6.5%, with the standard caveat about inflation and inflation expectations.

Few expected a change in monetary policy at this meeting, the real wagering is about at what point later this year (or even next) the Fed will begin to wind down its asset purchases (the “tapering”). A June survey of economists showed expectations fairly evenly distributed across the final 3 FOMC meetings of the year in September, October and December.

The language in today’s statement included some tweaks suggesting a Fed more anxious about the economy than anxious to reduce accommodation. According to this morning’s GDP report, economic growth was slower in recent quarters than originally estimated and the FOMC statement downgraded the language to reflect the committee’s expectation that growth “will pick up from its recent pace” rather than “proceed at a moderate pace” following the June meeting.

The FOMC also acknowledged the recent increase in mortgage rates as a potential threat to a strengthening housing sector, as well as more aggressively referring to persistent inflation below the 2% target as a risk to the economy. These changes in the statement suggest that any change to the timing of tapering would be to push it back rather than pull it forward.

Today’s reports have done little to clarify the likely path of the economy in the near term. GDP growth accelerated rather than decelerated in the second quarter. Are we gaining momentum or is there a much anticipated sequestration-slowdown looming in the second half of the year? (Could we have dodged that bullet completely?) If the Federal Reserve is any indicator, anxiety about the economy seems to be getting higher not lower. Fed chairman Bernanke has emphasized repeatedly that monetary policy will be driven by the economic data. So far, that’s not helping.


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