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April 28, 2006
Strong 1st quarter growth and tame PCE deflator growth
Real GDP was up 4.8% in the first quarter according to advance figures. (Full Press Release)
It appears that a couple of items that dragged down 4th quarter GDP were an aberration. I figured that the weak government purchase figures were nothing to worry about. However, I was a genuinely concerned about durables three months ago. Today's figures on durables make up what was lost in the 4th quarter, but taken together the last 6 months have been pretty bad for durables. If that continues through the rest of the year, it will be a drag on GDP.
Taken in context, today's report looks good mostly because the last one looked so bad. The average growth over the last 6 months is still in the 3 percent range. That's acceptable but not breaking any records. I think that Bernanke and the rest of the crew at the Fed are correct to expect GDP to slow just a little bit in coming quarters--maybe around 3% or the high 2's. I think it would have taken a number like 5.5 or 6% today to get me to argue that the rate increases should go on unabated. Bernanke wants to pause. I think we could use a pause in either June or August--data dependent of course.
Let us not forget about the GDP deflator and the PCE deflator which are included in today's report. Inflation as measured by the GDP deflator came in at 3.3%. The PCE deflator registered only a 2.0% increase--the lowest in over a year. So was the March CPI a one-off event? I'm still waiting on the April data before committing to an answer.
But putting it all together, I am comfortable now with a policy regime in which rates are expected to rise every 12 weeks instead of every 6 weeks. I do not want them to give any impression that a pause is a stop. Inflation is still at the top end of my comfort zone. But we also need to remember that we've got 2 or 3 rate increases in the pipeline that were not anticipated by the market when this process began. As the last few hikes start to take effect, we can probably afford to ease up a little.
Or as I like to say, take a little pressure of the brake pedal, but don't take your foot off of it.
UPDATE: See also Angry Bear, Brad DeLong, and Andrew Samwick.
Posted by William Polley at April 28, 2006 10:29 AM
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Comments
Samwick is worried about low personal savings, DeLong is advocating fiscal restraint, while I (over at Angrybear) suggest that the state and local governments are restraining spending but not the FEDs.
Posted by: pgl at April 28, 2006 1:14 PM