Every morning I record a podcast in French (see here) on a specific topic. The text below is the translation of this morning podcast.
US GDP growth has been revised on the upside for the third quarter. In the first estimate it was 3.5% at annual rate. It is now 3.9% with the second estimate.
The acceleration came mainly from internal demand. Its contribution to the GDP quarterly growth is now 3.3% versus 2.8% for the first estimate. As government expenditures’ contribution was almost the same in the two estimates, the improvement was driven by the private demand (HH consumption, companies’ investment and residential investment). Its contribution to GDP quarterly growth was 2.5% versus 2% in the first estimate.
More generally, private demand momentum is the main source of the US recovery. Since the trough of the second quarter of 2009, private demand has increased by 2.7% at annual rate. It’s stronger than GDP growth which was at 2.3% only.
On this point, comparison with the Euro Area is cruel.
From the same quarter in 2009, private demand in the Euro Area was down by -0.3% at annual rate. It is slower than GDP growth which was at 0.7% on the period.
2.9% in the US, -0.3% in the Euro Area the divergence is spectacular.
The breakage can be seen after the first quarter of 2011. Since this quarter, private demand was up by 2.9% at annual rate in the US. It was down by -0.9% in the Euro Area.
Economic policies divergence is the explanation. In a large area, it is impossible to expect a strong and long-lasting growth momentum when it is not driven by the private demand.
In the US after the 2008/2009 negative shock, the strategy was to let the private sector to adjust to reduce the imbalances that led to the crisis. Economic policies were not perceived as a constraint.
In the Euro Area, monetary and fiscal policies were on an austerity mode in 2011 and 2012. They have never allowed a deep adjustment on the private sector. They have been an unavoidable constraint that led to a stop on GDP growth.
The US has perceived the 2008 shock as strong, deep and persistent: a possible breakage. In the Euro Area it was perceived as a negative shock in a business cycle framework, so lacking of persistence. Economic policies have a major responsibility in the current GDP growth and in the divergence seen in the two areas.
The other question is about the Fed. Will stronger growth force it to change its monetary policy more rapidly than what was scheduled? My answer is no as there are still no inflationary pressures. GDP price was up by 1.4% at annual rate in the third quarter and the consumption price index that was released yesterday with the national accounts was just up by 1.3%.
These new figures are key as the inflation rate is still well below the Fed’s target of 2%. The Fed mustn’t act before the fact. It would be counterproductive. On this issue there is a methodological point to mention. Fed’s target is 2% meaning that the inflation rate can go above this level without being perceived as too accommodative. This is an important difference with the ECB for which the target is below 2%.
The Fed can accept an inflation rate above 2% and that’s what it will do. As far as there is no strong and long-lasting acceleration of the inflation rate, the Fed will not have to hasten the change in its monetary policy.
It can wait again even with a GDP growth number stronger than expected.