The BEA revised the U.S. GDP growth rate for Q2 2008 to 2.8%, down from the 3.3% growth estimate made last month. The decrease was due to new data that came in this month, which showed lower exports and higher inflation than previously thought. Given the poor performance of the economy this quarter, this new estimate may mean the economy could slip into negative GDP growth for the third quarter, which would then qualify as a technical recession. The definition of a recession is when GDP growth is negative for two or more quarters. (Source: GDP News Release)
The good news is that it is still within healthy growth range, which is about 2-3%. Furthermore, it is still higher than Q1 economic growth, which was only .9%, and better yet than the Q4 2007 economic decline of -.2%.
Growth for 2007 was 2%, down from the 2006 growth rate of 2.8%. This decline in growth has been due to the housing market slowdown and related weak consumer spending. For a review of the most recent GDP reports, see GDP Current Statistics.
What It Means to You
The spurt in Q2 growth was partly a result of the Economic Stimulus Package checks, mailed out in Q2. Since this was a just a one-time event, many are concerned that the economy will turn down again in Q3. Furthermore, export growth was driven by a weaker dollar, which has recovered slightly in Q3. Also, economies in the EU area and Japan are slowing, which could trim U.S. exports. (Source: FinFacts Ireland, Dr. Peter Morici: U.S. GDP Growth Up 3.3% in Q2, August 26, 2008)
Comments
I believe the Fed’s (Bernanke’s) attempts at meeting the “full employment” mandate has missed the mark. The action was too late since we are looking at the remanants of poor Fed policy (Greenspan) in 1995-1996.
In my humble opinion, at this point, Fed has to raise interest rates – not cut for the following reasons:
- It is obvious from the Term Structure and rates fully helter-skelter, Fed Funds rates has no effect on the mortgage rates or commercial markets. LIBOR is a few hundered basis points above Fed Funds rate. Businesses are already paying significantly high borrowing rates and the unemployment is being driven by higher rates due to credit freeze not the present Fed Fund rates.
- Commit to a strong dollar inspite of excessive liquidity coming into the market: Raise interest rates if you have to to prop dollar which will drive crude prices lower and hence gasoline prices lower to 2003-4 levels in the short run. This gives consumers breathing room to come back into the December holiday sales. This prong of the economy is not being directly addressed by any of the Congressional policies.
It won’t be pretty in the short run any way you look at it, but it is preparing for the future.
At the end of of it all, the prescription has to include:
- Aggressive capital investment incentives to small and medium businesses – could be tax breaks or one time incentives.
- Low deficit spending and Fiscal responsibility.
- Stronger dollar to keep the money flow into the US.
Hi Ajay,
I agree with you but the problem is that the Fed Funds rate has become almost more important as a psychological symbol than as its true function.
Any attempt at a contractionary fiscal or monetary policy at this time will only panic the markets further.
Unfortunately, the Fed must continue its expansionary policy until the panic subsides. At that time, as you said earlier, pent up demand will restore upward momentum to the economy. At that time the sound fiscal and monetary policy can be reinstated…and we’ll need it, or the dollar will plummet (may happen anyway) and inflation will take off.
Kimberly