Steady As She Goes

by: Tim Duy

The BEA released revisions to Q1 GDP numbers today, taking growth down a hair from the original 2.5% to 2.4%. Bloomberg is claiming that the downward revision to GDP and a rise in initial unemployment claims account for today's gain in equities. The idea is that the weaker data will dissuade the Fed from slowing down the pace of asset purchases this year.

It is of course dangerous to assign a cause to every fluctuation in asset prices. In this case, I am hard pressed to see that today's data has any meaningful impact on policy. If anything, a focus on the data over a longer period rather than the month-to-month or quarter-to-quarter movements should convince you that little has changed since 2010. Gross domestic product and income in levels:

0530GDP1

Gross domestic product and income year-over-year:

0530GDP2

Abstracting from inventory changes, look at the remarkable consistency of real final sales growth:

0530GDP3

And as far as initial claims are concerned, you must have pretty sharp eyesight to conclude that something fundamentally changed last week:

0530CLAIMS

Also note the the Fed may discount soft GDP numbers in any event. Recall the words of New York Federal Reserve President William Dudley:

“The important thing to recognize about the U.S. economy is that things are actually improving underneath the surface,” Dudley said in the interview. “We don’t really see that so much in the activity data yet because of the large amount of fiscal drag.”

Policymakers are trying to look past the fiscal drag to see if it is bleeding through to the broader economy. If not, they will conclude that growth is set to jump next year as the fiscal impact wanes. And they want to be ahead of the jump with respect to QE. Hence why the next few months of data are so important.

Bottom Line: Today's data are not likely to have an impact on monetary policy.