Friday, February 27, 2015

GDP for 2014 revised to just below 2.5%

This morning the revision to the fourth quarter GDP was released. The Q4 number was revised down to 2.2% which brought the overall GDP number for 2014 down to just below 2.5%. This is viewed as pretty weak growth given the massive amount of stimulus the US Fed has injected to try and boost the economy. Below is a link to an interview Alan Greenspan did on CNBC in anticipation of this lower GDP number where he calls the US economy "not strong." Market reaction to the news was minimal as the revised number came in about as expected.


CNBC: Greenspan - Effective Demand as Weak as During the Depression

"The fact that the market is anticipating that the Federal Reserve will raise interest rates, yet the yields on the 10- and 30-year Treasurys are falling is an indication of how weak the overall global economy is, former Fed Chairman Alan Greenspan told CNBC on Thursday.
In fact, effective demand is extraordinarily weak, he said.
"The way I measure it, it's probably tantamount to what we saw in the later stages of the Great Depression," Greenspan said in an interview with "Closing Bell."
That said, he acknowledged "it's not anywhere near what the problems were back then, but we haven't seen anything like that since then."
Greenspan, who served as Fed chair from 1987 to 2006, also called the overall economic data for the United States "not strong."
While the jobs growth has been very significant, there is evidence of weakened productivity, he said.
"That is a key statistic which tells how the economy is functioning."
. . . . . .
My added comments:
Earlier this week Fed Chief Janet Yellen told Congress not to expect a rate hike from the Fed at least for the next two meetings and that they would continue to monitor the economy before making any rate moves. She also said the markets would get plenty of advance notice if a move on interest rates was coming.
This supports Jim Rickards prediction that the Fed would not raise rates, at least for now. Many analysts were forecasting a Fed move to raise rates early was about to happen. Now most have moved back their forecast to June at the earliest and more likely sometime in the fall. Jim Rickards continues to believe that the economy is weaker than the Fed models show and that they will not raise rates at all this year. 
Early estimates for GDP in the first quarter for 2015 are around 3%. While the US labor market shows some improvement, most agree that the numbers are still weak because the labor participation rate is still very low and wages are still low. This indicates some people who cannot find work are dropping out of the labor force (no longer counted in the unemployment rate calculation) and that some of those finding jobs are not finding high wage jobs or full time jobs. Unless those numbers improve, the Fed has not shown an inclination raise rates. 
There is also a lot of concern as to how world markets will react to higher interest rates which would impact housing sales, the stock market, and interest expenses for businesses. Higher rates could also trigger a sudden move out of various kinds of bonds in a disorderly way (too many people might try to sell at once). All these are concerns that have been expressed by various IMF and BIS reports. Also, how actions by the US Fed may impact other economies around the world is a concern.

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