In a Friday afternoon dispatch issued in the wake of the government's jobs report earlier that day, Christopher Rugaber and Josh Boak at the Associated Press wrote that "most economists ... forecast a strong rebound in economic growth - to a 3.5 percent annual rate in the current April-June quarter. And growth should reach nearly 3 percent for the full year, up from 1.9 percent in 2013, they expect."
There are two problems with that prediction. The first lies in how strong the third and fourth quarters will have to be for the economy to get "nearly 3 percent" for the full year, given the tiny first-quarter annualized growth of 0.1 percent reported on Wednesday. The second and perhaps more crucial issue is that the full-year estimate significantly exceeds the "altered assessment" at the Fed concerning how fast it thinks the economy can grow without running the risk of igniting inflation.
The math problem is: "If economic growth in the first quarter remains at an annualized 0.1 percent and economists' predictions of 3.5 percent for the second quarter come true, how fast will the economy have to grow during the second half of the year to achieve 2.9 percent growth for the entire year?"
The non-Common Core solution (ignoring a tiny amount of compounding): "The sum of all four quarters' annualized growth will need to be 11.6 percent (4 times 2.9). If the sum of the first two quarters is 3.6 percent (0.1 plus 3.5), the final two quarters will have to come in at a combined 7.8 percent (11.4 minus 3.6). This means that annualized growth during the last two quarters will have to average 3.9 percent (7.8 divided by 2)."
The economy has had two quarters with combined growth rates totaling 7.8 percent or more only three times since the turn of the century, all during the unbelievably miserable and awful (/sarcasm) Bush 43 administration:
- Q4-2004 and Q1-2005 — combined 7.9
- Q2-2003 and Q3-2003 — combined 10.7
- Q3-2003 and Q4-2003 — combined 11.5
The closest result achieved during the Obama administration was the combined 7.6 seen in Q4-2011 and Q1-2012.
Readers may say, "Well, at least there's a slight chance this might happen, and the first quarter might get revised up."
Except for one thing (besides how the more likely first-quarter revision result seems to be pointing down instead of up): In none of the previous three instances noted above was the Federal Reserve consciously worried that such growth might cause inflationary problems. A Bloomberg report by Rich Miller published Friday morning, over seven hours before the AP pair's report, said exactly that. It was accompanied by a clear expression of concern about the economy's future course (bolds are mine throughout this post):
Yellen’s Fed Resigned to Diminished Growth Expectations
Federal Reserve Chair Janet Yellen and her colleagues have lowered their sights on how fast the economy needs to expand to meet their goal of cutting unemployment.
No longer are they saying growth must accelerate from the 2 percent to 2.5 percent pace it has generally averaged since the recession ended. Instead, they are stressing the importance of preventing the expansion from faltering.
Exhibit number one: the Fed chief herself. Yellen said on April 16 that a key question facing the central bank is what “may be pushing the recovery off track.” Contrast that with her comments on March 4, 2013, of the importance of seeing “a convincing pickup in growth.”
Most FOMC (Fed Open Market Committee) participants forecast gross domestic product growth of 2.8 percent to 3 percent this year and 3 percent to 3.2 percent in 2015, according to projections released March 19.
... policy makers ... (marked) down their estimates of the economy’s potential growth rate: the speed at which it can expand over the long run without generating faster inflation while holding unemployment steady. Most FOMC participants pegged that rate at 2.2 percent to 2.3 percent in their March 19 projections. That’s down from the 2.5 percent to 2.8 percent range they saw in April 2011.
Something's got to give between the FOMC's 2014 and 2015 predictions and its "potential growth rate" assessment. They seem not to believe that the economy can chug along with growth of over 3 percent for seven quarters without igniting inflation — but that's what they're predicting anyway.
It appears that if the Fed really saw nearly 4 percent growth materialize during the third or fourth quarters, it would seriously consider raising interest rates to pull it back to prevent it from happening.
One leftover point is that the Fed is still concentrating on the official unemployment rate, and almost seems to be writing off the long-term unemployed. In the nearly five tepid years since the recession as officially defined ended in June 2009, they have languished. Many have given up looking for work. Long-term growth of just over 2 percent isn't going to change that. Imagine the howls of outrage we'd be hearing from the left and the leftist press if this course was undertaken by the Fed during a Republican or conservative presidential administration.
Another annoying element of the AP report is its headline: "AMERICAN ECONOMY BOUNCES BACK FROM BRUTAL WINTER." How many times when the news is bad have we been told, "We shouldn't draw conclusions from only one month." Yet here the AP is, celebrating one month of nice payroll growth in its headline, even though Rugaber's and Boak's report noted other serious problems:
... the (unemployment) rate fell that far because many fewer people began looking for work in April, thereby reducing the number of unemployed. The proportion of Americans who either have a job or are looking for one dropped to a three-decade low.
And the monthly employment report the government released Friday showed that worker pay has yet to pick up - evidence that the job market has not fully recovered.
... Many of the long-term jobless stopped looking for work last month. Their ranks fell 300,000 - the sharpest drop in 2 1/2 years - to 3.5 million.
But people who only look at the headline will be cheered. That's a "mission accomplished" for the AP's headline writers.
Cross-posted at BizzyBlog.com.
