Sharp Slowdown in Nominal GDP Growth Adds to Pressure on Fed
The latest data from the Bureau of Economic Analysis show real GDP growth slowing to a 1.5 percent annual rate in Q2, down from 2 percent (revised) in Q1. That pathetic figure looked almost good to many observers who expected even worse. However, the more worrisome, although less noticed, number was the slowdown of nominal GDP growth from a 4.3 percent annual rate in Q1 to just 3.1 percent in Q2.
As the chart shows, that is the fourth consecutive quarter of decelerating NGDP growth. NGDP is now growing well below its historical trend of around 4.5 percent, at a time when it should be growing faster than trend if there is to be any hope of closing the NGDP gap, the output gap, the employment gap, or any other gap.
The deceleration in NGDP growth reflects, in part, the slowdown of the real economy, and in part, a slowdown in the rate of inflation as measured by the national income accounts. The next chart shows three key inflation measures from the national accounts: The implicit deflator for GDP as a whole, the implicit deflator for final purchases, and the deflator for personal consumption expenditures. All of them confirm the story told by the Bureau Labor Statistics, which uses an entirely different methodology to measure the consumer price index and core inflation. However you measure it, inflation has fallen well below the Fed’s 2 percent target.
All of these data increase pressure for action ahead of next week’s meeting of the Federal Open Market Committee. The Fed’s main policy making body has been split among three groups: Inflation hawks, who fear that it is only a matter of time until a growing money supply starts pushing up prices; advocates of a renewed program of quantitative easing, who think it is time for bold action to forestall a double-dip recession; and fence sitters. The last say they have been waiting for more data, and will move one way or the other if inflation ticks up or growth slows. Perhaps this latest slowdown in NGDP will be enough to convince some of them to change their votes.
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