Home“GDPNow” Shows Further Contraction Ahead

“GDPNow” Shows Further Contraction Ahead

A running estimate of real GDP growth in the United States, shows further weakness into the second quarter 2020, after a recent decline beyond -45%. Before interpreting the release, one must consider the current economic context, it is important to remember that it does not capture the impact of the coronavirus pandemic beyond the impact on GDP data.

GDPNow is a key metric of economic activity, and, for this reason, especially important to policymakers and traders alike. To highlight its importance, consider that the Atlanta Fed GDPNow release is one of the four variables included in the staff projections Federal Reserve Board members receive every six weeks when deciding on the future path of the federal funds rate.

A Detailed Look at the GDPNow Latest Estimate

The latest estimate, released on June 1st, shows the forecast down to -52.8%, falling from -51.2 previously. Consumer spending (PCE – Personal Consumption Expenditure) fell by the most, while residential investment, nonresidential fixed investment, and change in private inventories remain relatively stable.

What is impressive is the size of the decline and the projected growth for  GDP in the United States. As a central bank, the Fed bases its staff projections for the construction and releasing of its forward-looking interest rate decisions.

The voting members of the Fed express their individual views in terms of the federal funds rate and the staff projection release a table full of dots – each dot representing one member’s view of the rate in the years ahead (two or three years).

Part of the Fed’s mandate is price stability, and the Fed indicated that the measure for core inflation is the PCE deflator. Such a low value puts pressure on the Fed to further ease monetary conditions to bring inflation near its two percent target.

Another important aspect of modern monetary policy is the relationship between the current interest rate level and inflation expectations. When a central bank sets the level of interest rate, it typically refers to future inflation for a period of two years ahead.

Since the transmission mechanism of the changes in monetary policy takes time to implement any new decision, the present economic conditions are fought with monetary policy decisions taken way earlier.

In other words, the Fed’s actions since the start of the coronavirus pandemic are not yet reflected in the economy. The results come with a lag, and any sign of improvement in the economic activity is a response to the Fed’s actions.

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