Grand Central: Time to Take Measure of Fuzzy U.S. Growth Accounting – Real Time Economics

The Wall Street Journal’s Daily Report on Global Central Banks for Monday, July 28, 2014:

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Two years ago the Commerce Department reported that the U.S. economy grew at an annual rate of 2.2% in the first quarter of 2012. Revisions over the next two months marked that number down to 1.9%. Then last summer the Commerce Department revised those and decades-worth of other numbers in comprehensive revisions to its accounting. It turned out the economy actually grew at an annual rate of 3.7% during that period. The revisions all together added $559.8 billion to the government’s estimate of the total U.S. output of goods and services. This revision was about equal to the total gross domestic product of Sweden, the world’s 22nd largest economy.

This is an example of the slippery challenge the nation’s bean counters face tallying up how much Americans produce. The Commerce Department will release fresh estimates of second quarter economic growth Wednesday, just as Federal Reserve officials begin their second day of policy meetings. Along with these new estimates, the Commerce Department will release annual revisions to its data, along with revisions to its accounting for international trade. (See Page 6.)

It could add some plot twists to the story of how this recovery is playing out. The economy’s anemic growth rate has been a big puzzle for central bankers. It’s been especially hard to reconcile with estimates that job growth has been surprisingly robust. A large first quarter contraction in output looked especially odd, even after accounting for the fact that cold weather was disruptive. But as past revisions show, measuring up this economy is a fluid business. After the new estimates and revisions Wednesday, maybe the pieces of this puzzle will fit together more cleanly.

-By Jon Hilsenrath


Fed’s Rate Debate Looks Set to Heat Up. Federal Reserve officials will likely move closer to ending their monthly bond purchases at a policy meeting next week and discuss when and how to raise interest rates. While Fed policy makers are unanimous on the bond-buying program, they are increasingly divided on when they expect to start raising short-term interest rates from near zero, where they have been since late 2008.

IMF Lays Out Own Fed Exit Strategy. The International Monetary Fund has plenty of advice for the Fed ahead of its policy meeting next Tuesday and Wednesday. To start, the Fed should think twice before relegating its traditional policy tool, the federal funds rate, to a supporting role, the IMF says.

Fed Forward Guidance Works, Sometimes Better Than Others: IMF. The Federal Reserve’s various efforts at honing its low-rates message have been successful at keeping borrowing costs down by giving investors greater clarity about the likely path of policy, according to the International Monetary Fund.  However, the policy’s effectiveness has varied depending on the type of guidance used,the IMF study on the U.S. economy said, published this week as part of its global economic forecasts.

IMF Official Warns of Bond Risk. High-yield U.S. and European corporate bonds may be overpriced and emerging-market bonds are at risk if borrowing costs rise faster than currently expected, the IMF’s top financial counselor said Friday. The fund is in a “state of alert, but not a state of alarm” over financial stability risks in some markets as low interest rates fuel risk-taking by investors seeking higher returns, said José Viñals.

Fed Approves Zions Capital Plan After Resubmission. The Fed announced Friday it has approved Zions Bancorp’s resubmitted capital plan, reversing a decision to reject the plan in March. The move clears the way for Zions to reward shareholders with Fed-approved dividends or share buybacks if the bank chooses to do so.

U.K. Recovery Flattered by Population Growth. It’s been an encouraging 24 hours for British economic policy makers. But the recent run of strong growth figures flatters the economy’s post-crisis performance, and understates the distance that still has to be covered until the recovery is complete. 

ECB Deputy Puts Faith in Easing Measures. Aggressive easing measures taken by the European Central Bank last month should address the problem to too-low inflation in the euro zone, ECB Vice President Vitor Constancio said Saturday, signaling that additional measures are unlikely in the near term.

ECB’s Praet Says Higher Wages Appropriate for Germany – Report. Higher wages are appropriate for countries such as Germany, where inflation and unemployment rates are low, a senior European Central Bank official told German weekly magazine Der Spiegel – Dow Jones Newswires.

Euro-Zone Inflation Rate Set for a Further Decline—Economists. Economists surveyed by The Wall Street Journal expect that figures to be released Thursday will show the inflation rate fell to 0.4% from 0.5% in June, further below the European Central Bank’s target of just under 2.0%. It is too soon to see the impact of stimulus measures announced by the ECB in early June on either growth or inflation, but a further drop in the rate of consumer price increases will underline the scale of the threat faced by policy makers. –Dow Jones Newswires.

Irish Central Bank Upbeat About Ireland’s Economy. In its most upbeat economic bulletin for over six years, Ireland’s central bank Monday increased its growth outlook for the country and said the coalition led by Prime Minister Enda Kenny may now have the fiscal room to lessen the worst effects of austerity.

Caixabank to Tap European Central Bank’s Credit Program. Caixabank SA, Spain’s third-largest bank by market value, plans to tap a new ECB credit program, aimed at stoking a wobbly European economic recovery, for €7 billion in funding, its chief executive said Friday. “There is no stigma, in fact, it is the opposite,” said CEO Gonzalo Gortázar.

Brazil Frees Up More Funds for Bank Loans. Brazil’s central bank on Friday announced measures intended to boost economic growth by freeing up more money for banks to loan out. The central bank reduced the amount of money that banks are required to keep as reserves from certain term deposits, which should free up 30 billion reais ($13.5 billion) for lending, the bank said. The accounts involved currently hold 405 billion reais.


The U.S. economy had an unusual bright spot in the dreary first quarter: the federal government. After two years as a drag on growth, the federal government’s economic output gave an annualized 3.2% lift to the overall economy in the first quarter, the Commerce Department said Friday. A series of spending cuts and last fall’s shutdown turned the federal government into a net drag on the economy in recent years, before last quarter’s reversal. The economy’s largest sector–finance, insurance and real estate–controlled a 0.6 percentage point to the contraction. That sector accounts for nearly 20% of the total U.S. economy.



-Israel’s central bank releases a policy statement at 1600 local time (1300 GMT)


-BOE’s Broadbent speaks in London at 0700 GMT

-Federal Reserve begins a two-day policy meeting in Washington


-Federal Reserve releases a policy statement at 2 p.m. EDT


-The Philippines’ central bank releases a policy statement

-Czech National Bank releases a policy statement at 1100 GMT


ECB Paper Identifies Most Growth-Friendly Cuts. A ECB paper has weighed in on a big debate among economists in recent years: how much of an effect fiscal belt-tightening has on the economy. The paper, written by an economist from the ECB and one from the IMF, concludes that fiscal consolidation does have a damping effect on growth over the short term, but it isn’t particularly long lasting.

Which Wage Measure Best Captures Inflation Pressures? Fed Chairwoman Yellen has made clear her perceptions of a healthy labor market hinge on more than just the unemployment rate or job gains. So how should she, or any economist, get the best feel for wage dynamics?  Economists at J.P. Morgan took a look at the issues in a note to clients, which they called “a field guide to wage-watching.”

Monetary Policy Has Aided Financial Stability. Taking account of the boost to the value of assets they already owned, and the fact that the more people earn, the more they buy financial products, Harvard University economist Gabriel Chodorow-Reich finds that the U.S. Federal Reserve’s monetary policy since 2008 has supported the stability of insurance companies, money market funds, bank holding groups and private pension funds.


Federal Reserve Bank of Dallas Richard W. Fisher writes in the Journal that the central bank is at risk of “staying too loose, too long.” Mr. Fisher writes that the economy is reaching the destination desired by the Federal Reserve “faster than we imagined” and that policy makers are now at risk of “fighting the last war.” Mr. Fisher also argues that the central bank cannot only rely on macroprudential measures to combat financial excesses that are “of our own making.” And he argues that in running “a hyper-accommodative monetary policy” after it is necessary to do so, the Fed risks “being viewed as politically pliant.”

Sheila Bair in the Journal writes  about what  she calls the Federal Reserve’s risky reverse repurchase scheme. “This program, while well-intentioned, could be a new source of financial instability. It needs a closer look.” Ms. Bair writes, “I applaud the Fed’s desire to eventually return interest rates to historical norms, but it is far from clear that its existing tools are insufficient to do so.”


-U.S. economic data on tap this week: an FOMC meeting, July’s jobs report, second-quarter U.S. GDP, and personal income and consumer spending.

-German business sentiment slid markedly in July, a closely watched survey showed, suggesting that turmoil in Ukraine and the Middle East may weigh on Europe’s largest economy.

-A group that includes Internet conglomerate Tencent Holdings Ltd. won permission from Chinese regulators to open a private bank, the latest move in Beijing’s effort to shake up lending in the world’s No. 2 economy.

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28 July 2014 | 10:57 am – Source:

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