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In the Nation's Interest


By Joe Minarik
Senior VP & Director of Research

Well, back to work.  And that includes toting up the key August economic data releases, and looking at the Federal Reserve’s policy decisions from its September meeting.


The data from previous months (employment, prices) and quarters (GDP) had shown significant fluctuations of late.  The growth picture bounced from despair to euphoria, and what had been near-stationary price levels appeared to lurch into accelerating inflation.  A straight line drawn through each of those series of dots would seem to show stable prices and slow (in fact, disappointingly so) but stable economic growth.  Of course, every such straight line always continues – until it doesn’t.  And inertia is a powerful force in economics.  It is knowing when the straight line breaks that is the challenge.  Were the spring and summer blips in the numbers the first signs of a breakout?  Well, apparently not.  The late August and early September data releases for the most part moved us back to those straight and (so far) stable lines.

Prices.  Inflation is, of course, the canary in the coal mine.  After the once-in-a-century (we hope) economic collapse in the financial crisis, reading the economy’s potential to produce is arguably harder than it ever has been for every living economist.  (And it never has been easy.)  We hope that the economy will recover fully, that discouraged workers will rejoin the labor force and find jobs, and that productivity growth will justify wage increases and stable prices for years to come.  But we cannot rule out that older discouraged workers will just retire, the economy will hit its capacity ceiling sooner than anticipated, and that inflation will accelerate and spoil the party before it really has begun.

Recent reports had led some to fear that inflation already was at hand.  Consumer and producer price inflation showed some acceleration from March through June.  But the August data seem to have put that fear to rest.

The Consumer Price Index (CPI) dropped by 0.2 percent in August.  The higher numbers from the spring and summer pretty clearly were a transient energy binge, showing up in particular months in varying combinations of prices of gasoline, electricity and natural gas.  Now that energy prices are moving back down toward their prior trajectory, the overall price index is correcting, too.

But the favorable CPI story is not only about energy prices returning toward their prior trend.  The CPI excluding food and energy was flat – zero inflation – and has risen only 1.7 percent over the last 12 months.  In short, although the future always is uncertain, there is no inflation in the CPI data today.

The Producer Price Index (PPI), which in my experience has signaled 15 of the last two inflation breakouts (credit to MIT economics professor and Nobel laureate Robert Solow), tells the same story.  After a spring-summer scare, the August index was quiescent, and all of the 12-month variants of the index are comfortably below 2 percent rates of increase.

In short, someday inflation again will be a problem.  But it isn’t a problem just yet.  It bears watching, but we should not bend ourselves out of shape to beat this dead horse.

Employment.  After data revisions, the six months from February through July each had seen creation of more than 200,000 net new nonfarm payroll jobs.  April saw 304,000 net new jobs, and June 267,000.  For five years out from a recession, those numbers might seem robust; but for five years of torpid recovery out from the deepest economic downturn in a long lifetime, they are far from startling.  Still, for some, recent job creation reinforced a fear that inflation is just around the corner.

Well, the 142,000 net new nonfarm payroll jobs in August hardly would sound an inflation alarm on their own.  Coupled with the stable inflation figures themselves, they suggest more an economy that is moving forward, but very much in the slow lane relative to the very rapid downhill plunge of the financial crisis.

Output.  The second estimate of the second quarter’s GDP growth is not yet square on the long-term trend line, and it did in fact seem to some to be too strong for comfort.  But it followed a very soft, weather-dampened first-quarter result, and taken in context (including the moderate August job-creation figure) is no cause for alarm.

We pointed out earlier[], when some considered the first-quarter result worryingly weak, that several components dragging down that number were curious and thus likely to reverse themselves (particularly including trade) or were naturally self-reversing (notably inventories).  In fact, that is exactly what happened.

The first estimate of second-quarter GDP was 4.0 percent.  The second estimate, released in late August, is 4.2 percent.  The 0.2 percent increase is not a sea change, more like a drop in the bucket.  The second estimate is based on more-complete data.  It shows somewhat greater business fixed investment, and somewhat lower business inventory investment.  But in both instances, these remain comparatively sharp reversals of what were in the first quarter comparatively sharp declines.  Add the first quarter and the second quarter together, and you have moderate steady-as-you-go growth – not enough to trigger overheating or even to raise spirits and eyebrows, but surely enough to keep the economy out of danger of falling back into recession for the foreseeable future.

The Fed

So when the Federal Open Market Committee (FOMC) met again on September 16 and 17, it essentially continued its policy – which is to say, a gradual dialing down of its “quantitative easing,” a continuing outlook of interest rates “below levels the Committee views as normal in the longer run,” and a watchful eye on the data.  The FOMC refuses to be cornered into turning its qualitative statements into precise calendar commitments; rather, it tries to make clear its willingness to move when necessary in an environment that challenges prediction and forecast.  Opinions differ widely, but the Fed is arguably in the right place in a very uncertain world.