The Independent Market Observer

In the News: The Fed and GDP Growth

Posted by Brad McMillan, CFA®, CFP®

Find me on:

This entry was posted on Jul 30, 2015 2:31:00 PM

and tagged In the News

Leave a comment

the FedIn the past 24 hours, there have been two pieces of news that tell us a great deal about the economy today and also show us how things are likely to evolve over the next year or so.

The Fed’s latest statement

The Federal Reserve’s meeting wrapped up yesterday, and the statement summarizing its conclusions was released at 2:00 P.M. These pronouncements are always pored over and parsed like Holy Writ, as the authors know perfectly well, so every word has meaning. In fact, several key words changed this time, and we can draw some conclusions about what the Fed is thinking from them.

The first is the addition of some to the statement “some further improvement in the labor market” is needed. As Ned Davis Research puts it, “This suggests we have seen a lot of progress and don’t need to see much more.” Additional changes that support this interpretation include the description of job gains as “solid” and unemployment as “declining” rather than having “remained steady,” as in the last statement.

As I read it, the Fed clearly feels better about the labor market, which has been one of the major concerns. It sounds as if the committee continues to lay the groundwork for a rate increase in September, although they left themselves an out in the form of inflation worries and continued mention of the data-dependency of any decision.

Second-quarter GDP growth

One of the key pieces of data that the Fed looks to, of course, is how fast the economy is growing. Released this morning, GDP growth for the second quarter came in at 2.3 percent, slightly below expectations of 2.5 percent, but first-quarter growth was revised up from −0.2 percent to 0.6 percent. As a result, growth for the first half came in slightly above expectations, including the revision.

The commentary on this has bounced around between disappointment over the Q2 shortfall and excitement over the Q1 revision. Neither matter that much in the long term.

Let’s look at GDP growth in two ways: first, on a quarterly basis and then on a year-to-year basis.

Quarterly: You can see that economic growth has ranged between −2 percent and 5 percent for the past five years, with an average of around 2 percent, which is right where we are. Growth has not been consistently accelerating, but it hasn’t been consistently dropping off either.

the_Fed

Year-over-year: Here, we see much the same trend, but we also see an acceleration of growth over the past two years, which, at least for the moment, is on hold.

the_Fed_2

If I were the Fed, this data would suggest an economy that is steadily, if slowly, growing, despite all of the headwinds over the past couple of quarters.

Slow and steady isn’t so bad

Slower growth means steadier growth, and potentially more sustainable growth. Given this pace of growth, the Fed will be able to raise rates slowly and steadily, which is what it ideally aims to do.

So, we have steady, if slow, growth, that is unlikely to create the kind of imbalances or overheating that can provoke a recession. And we have a Federal Reserve that continues to be very stimulative but has finally reached a point where it can start to normalize rates. Over the next couple of years, we’re looking at an environment of sustainable growth and continued, albeit diminishing, stimulus.

I can think of worse places to be.

                      Subscribe to the Independent Market Observer            

Subscribe via Email

Crash-Test Investing

Hot Topics



New Call-to-action

Conversations

Archives

see all

Subscribe


Disclosure

The information on this website is intended for informational/educational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Please contact your financial professional for more information specific to your situation.

Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets.

The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. All indices are unmanaged and investors cannot invest directly in an index.

The MSCI EAFE (Europe, Australia, Far East) Index is a free float‐adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. and Canada. The MSCI EAFE Index consists of 21 developed market country indices.

One basis point (bp) is equal to 1/100th of 1 percent, or 0.01 percent.

The VIX (CBOE Volatility Index) measures the market’s expectation of 30-day volatility across a wide range of S&P 500 options.

The forward price-to-earnings (P/E) ratio divides the current share price of the index by its estimated future earnings.

Third-party links are provided to you as a courtesy. We make no representation as to the completeness or accuracy of information provided on these websites. Information on such sites, including third-party links contained within, should not be construed as an endorsement or adoption by Commonwealth of any kind. You should consult with a financial advisor regarding your specific situation.

Member FINRASIPC

Please review our Terms of Use

Commonwealth Financial Network®