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[17 Jul 2014 | No Comment | ]
What if the Fed is Wrong?  Working Up to Economic Potential

A key ingredient of monetary policy is the estimate of “potential real GDP growth” – how fast the economy should expand. The Federal Reserve thinks potential is about 2¼% per year. Using this, the Fed estimates GDP is about 8.5% below potential and monetary policy should remain easy.
But what if the Fed is wrong? What if bad policy (tax hikes, spending, and regulation), which started even before the Panic of 2008, but got worse afterward, cut potential to 1.5%?

 
To clarify, we’re not using the word “potential” as a true, inviolable, …

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[10 Jul 2014 | No Comment | ]

There must have been thousands of new jobs created in the past few years just to comb through the minutiae of the employment data looking for negative nuggets. All someone needs is access to the Bureau of Labor Statistics website and a calculator. Then, you go through the jobs data and find some stuff to spin negatively.
The job doesn’t pay that well, unless you have a radio or TV show or website with advertising. But, it’s politically rewarding on both the right and the left to prove how bad the …

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[2 Jul 2014 | No Comment | ]

USA soccer lost to Germany last Thursday, but moved to the Sweet Sixteen of the World Cup anyway because it had previously beat Ghana and tied Portugal. US fans celebrated wildly after the loss to Germany, with some saying US soccer had come of age.
Confusing? Yep!
The same confusion affected many investors and political analysts last week when first quarter real GDP was downwardly revised to a -2.9% annualized growth rate and the stock market moved higher anyway. The bears finally got their data point, but the market didn’t cooperate.
 

There are …

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[25 Jun 2014 | No Comment | ]

A staple of the doomsday crowd is the idea that the US is on the verge of losing its “reserve currency” status. It’s held that prominent financial position since the end of World War II. But, now, the doomsday crowd argues the US economy is in a bubble, the Fed is printing money like crazy, government spending and regulation on the rise, so it’s just a matter of time.

 
Get ready they say, the dollar will plummet in value and interest rates will skyrocket, even above where US economic fundamentals suggest …

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[2 Jun 2014 | No Comment | ]

When the GDP report comes out Thursday, look out, the Pouting Pundits of Pessimism will have a field day.
It was bad enough when the government’s first report on real GDP growth for Q1 showed the slimmest of growth – a 0.1% annual pace. But, now, after adding up all the new data and revisions to old data, it is likely that government stats will show a shrinking economy – we expect a -0.4% annualized rate of growth.

Inventories will likely be revised significantly lower, but there should be other minor hits. …

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[5 May 2014 | One Comment | ]

The economic world lost a leading thinker this weekend with the passing away of Gary Becker, who, since the death of Milton Friedman in 2006, was the most influential, and important, living economist.
Becker, who won the Nobel Prize in 1992, led an invasion of classical economic thought into previously sloppy and hidebound areas of study such as sociology, demography, and crime. He studied human capital. Think of it this way: Without Becker, bestselling books like Freakonomics wouldn’t even be possible.

Prior to Becker, the academic study of these topics was dominated …

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[23 Apr 2014 | No Comment | ]

When it comes to forecasting near-term real GDP growth, there are parts of the economy that are easy to follow and then there parts of it that are tough.

 
The easy parts (with lots of timely information) are consumer spending, business investment, and home building. And despite one of the worst winters in multiple decades, this portion of the economy looks like it grew at a solid 2.5% to 3% annual rate in the first quarter, right in-line with the trend since the recession ended in mid-2009.
To get that kind of …

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[11 Apr 2014 | One Comment | ]

For the last couple of months it’s been an open question whether US economic growth was slower because of brutal winter weather or if something more serious and worrisome was going on.

 
We have consistently sided with the “weather theory.” The winter of 2014 was one of the coldest and snowiest in the past 30 years, at least in the population centers in the East and Midwest. It was likely enough to slow real GDP growth from the 2.6% pace of the past year to under 1% annualized growth in the …

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[28 Mar 2014 | No Comment | ]

During Fed Chair Janet Yellen’s first press conference last week, some analysts said she made a major mistake. Supposedly, she put an actual time limit on when the Fed may start to lift the federal funds rate.

 
 
She said it would be “around six months” after the Fed ended any further purchases of bonds for its Quantitative Easing program. This could be true, but she used enough qualifiers that it became clear six months is not a hard target.
The Fed dropped its 6.5% jobless rate as a trigger point for raising …

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[21 Mar 2014 | No Comment | ]

No one can know with absolute certainty exactly how much the brutal winter weather affected jobs. But, the 162,000 increase in February private sector payrolls was a positive shock to the consensus. January, at 145,000, was surprising, too.

 
The Labor Department also has a monthly survey on civilian employment, an alternative measure of jobs that includes small business start-ups. The February total was just 42,000. But the Labor Department said 601,000 people missed work last month because of weather, compared to an average of 357,000 over the previous ten Februarys.
In other …