Friday, April 29, 2011

Economic Growth & Inflation in the United States

 Earlier in the week, the economist Tom Duy wrote that he expected Bernanke on Wednesday to address growing inflation expectations while maintaining an unchanged monetary policy.  Most people have a very difficult time distinguishing between transitory headline inflation (which hits the wallet hard) and core, sticky inflation which consists of continuing price increases which impact prices and wages throughout the economy.  This is why inflation expectations can be an economic problem when transitory inflation exists, because people start expecting real core inflation and saving, which can slow the economy.  We have already written that Duy and others were very disappointed in Bernanke's over reaction to inflation expectations as opposed to real core inflation in his remarks and his failure to sufficiently address labor costs and unemployment.

U.S. GDP for Q1 was announced this week at 1.8% (analysts had expected 1.9%).  If you take a look at the different segments of GDP and their contribution to the total number, you will see an increase in imports and decrease in government spending which have a negative impact which far outweigh increases in exports and inventories which have a positive impact.  Growth this slow can often mean higher unemployment.  Until housing (which is on the edge of double dipping) and business investment improve, the trend of economic growth will continue to be slow and disappointing.

One guest writer at did a chart on GDP with and without government spending included which, not unsurprisingly, showed that the number of years since 1960 with negative GDP growth more than doubled.  The proper purpose of government national deficits is a response to aggregate demand, as we have written, and its resulting in economic growth when there would have been negative growth it what it should do.  The guest writer is concerned about the resulting debt when it should be the private sector growing, but he appears more concerned about deficit than why the private sector was not otherwise stimulated.

The U.S. also released this week its Personal Income and Outlays report for March which showed personal consumption expenditures (PCE) going up 6 tenths of a percent in March from February on the increase in food and fuel.  Personal income rose 5 tenths of a percent, but disposable income only rose one tenth of a percent.  Doug Short at did updated charts on headline and core CPI and core and headline PCE and comparing core PCE and CPI against each other for two different time periods.  While we mere mortals cannot eliminate food and fuel from our consumption, the transitory volatility of food and fuel prices can be misleading in actual sticky inflation.  The price increases have to be continuous and impact production prices and wages to be core inflation.

This is also why I pay only passing attention to consumer sentiment, because it is such lagging, old information, which is why while inflation expectations are increasing right now, the consumer sentiment survey showed increased optimism.  Transitory inflation hurts, but, if inflation became sticky, the real pain sets in.  It is like a child becoming mildly sick but playing to sympathy and the parent does not sort the symptoms and behavior out and over reacts.  Going to the doctor, when it serves no good purpose, makes life all that more expensive.

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