Trend growth

The Fed's Crystal Ball: Looking Beyond the COVID-19 Recession

Over the past 75 years, no one has seen anything like the COVID-19 shock to the global economy. Nor have we seen anything like the swift, broad and massive fiscal and monetary expansion that followed.

In the United States, the economic rebound has started. As states and municipalities relax the lockdown, businesses closed by the virus are gradually reopening and employment is rising. But, there remains tremendous uncertainty about the speed and extent of the recovery.

This was the backdrop for the Federal Open Market Committee’s (FOMC) release last week of its June Summary of Economic Projections (SEP)—the first SEP since December. Unsurprisingly, attention usually focuses on the FOMC’s interest rate projections: with the exception of two participants, the Committee does not anticipate an interest rate increase over the forecast horizon to the end of 2022.

In this post, we concentrate on the Committee’s projections for the real economy. Our conclusion is that these contain two elements of optimism. First, while the recession is clearly the worst since the 1930s, FOMC participants believe that the recovery will be roughly twice as fast as the one from the GFC. Second, their projections are that longer-run economic growth will match the pre-COVID pace. That is, in contrast to the GFC experience, COVID-19 will not usher in a slowdown in trend growth. Compared to the FOMC, we believe there is room for disappointment, especially with regard to the longer run.

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GDP: One size no longer fits all

Even the most casual reader of financial and economic news knows that the speed of economic growth matters. Businesses―manufacturers, service providers, and retailers, among others―need to know so that they can decide how much to invest in new production facilities, how many people to employ, and what to stock on their shelves. Fiscal policymakers need to know so that they can estimate government revenue and expenditure. And monetary policymakers need to know so that they can adjust their policies in an effort to ensure low, stable inflation and strong, stable, and balance growth.

But, does it make sense for all of these people―firms, households and governments―to focus on fresh estimates of GDP? How much attention should we pay to any new number? That is, when the U.S. Bureau of Economic Analysis (BEA) announces that their initial estimate of growth for the quarter just ended is 2% or 3% or (as it was last week) 4%, what should we think?

While GDP was once a key cyclical indicator, its value has declined substantially. In this post, we highlight three reasons: timeliness, seasonal adjustment and revisions. Not surprisingly, in the era of big data, those who need information on growth are increasingly turning to more timely indicators customized to their needs….

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