GDP: Halloween Edition
The BEA just released third quarter GDP - as expected, the US economy expanded by two percent, up from 1.7 percent growth in the second quarter. In honor of Halloween, there are a few tricks and treats in the GDP report.
GDP Treats:
- +2 percent is WAY better than -6.8 percent, which was where we were two years ago, at the depths of the Great Recession (Q4 2008)
- This was the fifth consecutive positive quarter
- Personal consumption was up 2.6 percent, from 2.2 percent in Q2
- Two percent is not strong enough to create a surge in jobs
- This is a weak recovery: in the four quarters since the Great Recession ended, growth has been approximately +3 percent, which is almost half the average 5.9 percent expansion in post-war recoveries
All of this punk growth gives the Fed even more ammunition to embark on its second bond-buying spree (aka "Quantitative Easing 2" or "QE2"). The day after the mid-term elections, the Fed is expected to announce that it will buy $100 billion worth of US bonds each month until the economy perks up. This is likely to be a smaller and slower round of buying than the massive $1.75 trillion purchases, when the economy was in deep trouble.
The goal of QE2 is to stimulate the economy by boosting asset prices, adding to the wealth effect; lowering borrowing costs, which would help consumers and might encourage companies to spend money on job creation and banks to lend more; and increasing inflation, which would induce consumers to buy today rather than tomorrow.
To some extent, QE2 has already worked a little magic--since Chairman Ben Bernanke first talked about the plan in August, US stocks have rallied more than 10 percent, yields on ten-year bonds have dropped by half a percentage point, the US dollar has depreciated by six percent on a trade-weighted basis and inflation expectations have increased.
But (you know there was a but, right?) QE2 might not work out exactly as the Fed plans.
- While it's nice to see our retirement accounts rise in value, the Fed risks creating another round of asset bubbles (see: commodities and emerging market stocks).
- Long-term interest rates have already dropped from a high of 4 percent in April to approximately 1.5 percent today without the economy growing accordingly--will another half a point really make a difference?
- Consumers are busy whacking down debt and may not borrow even if rates drop further
- Banks already have around a trillion dollars hanging around and they don't seem too motivated to do much with it now
- Companies seem happy to hoard cash rather than hire new workers, regardless of low rates. So far, the biggest impact of low interest rates on corporations is that they have been able to borrow money cheaply, helping them to either repurchase their own stock or hit the M&A market
Happy Halloween!!
More on MoneyWatch
Fragility of Recovery Exposed by Third Quarter GDP Report
Mark Thoma: Real GDP Grows 2 Percent in Third Quarter
GDP: What It Means and Why You Should Care
3Q GDP: What We're Buying
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