Is That All There Is?

| About: ProShares Inflation (RINF)

By Robert Eisenbeis, Ph.D.

The title (above) of Peggy Lee's hit song from 1969 captures the general reaction to the BEA's first release of second-quarter GDP for 2016. The 1.2% growth for the quarter was not only underwhelming but was accompanied by a downward revision of first-quarter growth from 1.1% to 0.8%, which surprised most forecasters who were looking for Q2 growth in the 2.3% to 2.5% range.[1]

The first- and second-quarter numbers mean that the economy is essentially flat in 2016, and now gives us three quarters in a row of growth at or below 1.2%. Obviously, these numbers can be revised, but in most instances the revisions are related to exports and imports. Given what has happened to the dollar, if imports are revised, they will be revised downward; but so will exports, which mean that the relative reductions will determine the impact of revisions to GDP. There were positive contributions in the Q2 numbers from personal consumption expenditures (PCE) and exports. But the list of negatives is noteworthy and includes negative contributions from private inventory investment, nonresidential fixed investment, residential fixed investment, and state and local government spending. These negatives are important because they are occurring in the categories that generate employment growth and accelerate output.

Interestingly, the Beige Book used four words to characterize growth in the various districts: moderate, modest, slightly, and steady. Moderate, in Fedspeak, has in the past been used to describe growth in the 1.8 to 2% range.[2] The other terms describe growth that steps down in order from there. Employing these four characterizations of growth, seven reserve banks described growth in their districts as modest, while only two said growth was moderate; Chicago said growth was steady; and Atlanta and Dallas characterized growth as increasing slightly. Interestingly, despite the Beige Book characterizations, the FOMC chose to describe overall growth as moderate in Q2. But clearly, in view of the BEA's first estimate, a better word would have been modest. One can't help but wonder how the FOMC's statement would have been different had the Committee had the Q2 estimate in hand when it met. Since the Committee is now so data-dependent, why didn't it schedule its meeting for next week, when it would have had the Q2 estimate in hand? When key data releases occur slightly after critical meetings that looks like poor scheduling.

This Q2 GDP number, together with its first revision, will be the new data point for the FOMC to vector into its summary of economic projections to be released after the September meeting. This growth number and the pattern for the past three quarters indicate that the economy is growing - but not at a rate to suggest that aggregate demand will put upward pressure on prices in the near term, notwithstanding what happens to employment or wages. What these new data suggest is that the odds of a September rate hike are now extremely low, and the odds will likely remain low throughout the rest of the year. As we said when commenting on the FOMC's July statement, we remain cautious at Cumberland, and these new data only serve to reinforce that stance.

[1] The NABE survey and Atlanta Fed GDPNow forecast called for 2.3% growth, while the WSJ survey had growth at 2.5%
[2] See Jeffrey Sparshott, "Fedspeak: What's the Difference Between 'Modest' and 'Moderate'?," The Wall Street Journal, Aug. 1, 2013