August 12, 2003

"Sustainable Growth"

Bonds fell after today's FOMC meeting--possibly because the Fed dropped from its statement the phrase in which it worries about the economy's ability to deliver "sustainable growth": - Fed's Message Boosts Stocks: Stocks jumped and bonds fell after the Federal Reserve left its interest-rate targets unchanged, as hope spread among investors that an economic recovery is under way. Despite the Fed's effort Tuesday to reassure bond investors by saying that it doesn't plan to raise interest rates "for a considerable period," investors focused mainly on the prospects for economic growth. That meant that stock investors, who seek profit growth, were more pleased than bond investors, who prefer the prospect of falling rates. The Fed's statement, issued after its policy meeting Tuesday, was strikingly similar to one provided after the previous meeting, in June. But analysts noted that the Fed tinkered in small ways that suggested an improving picture. This time, for example, Fed policy makers no longer expressed worry about the economy's inability to show "sustainable growth"...

IMHO, the Fed should still be worrying about the economy's inability to show "sustainable growth". The economy's "sustainable growth rate" looks to be something north of 3.5% per year: it's not clear to me whether or not the unemployment rate would fall if real GDP growth were a steady 3.5% per year. And it's not clear to me that we are on track for growth faster than 3.5% per year over the next couple of years.

Posted by DeLong at August 12, 2003 08:07 PM | TrackBack


Getting a handle on whether we are on track for trend or better growth will not be easy in the near term. Today's retail sales figures were spendid, well ahead of trend. The two-month pace of sales is the best this year - July sales weren't a one-month fluke. Trouble is, tax rebate checks hit in July. Apparently, people spent them. Auto sales were also at a high for the year, and not likely to stay at that pace. Refinancing was also very high just prior to July, so put cash in some pockets. August will see some tax rebate checks arrive, too. That may help make it three good months in a row for retail sales. Note the 3-month annualized pace of rise for retail sales is now 8.6%, with less of that gain from prices than we are accustomed to seeing.

All the while, incomes aren't rising so fast, there won't be any tax rebates checks in September, and refinancing has fallen off the table (now down 33% from a year ago). Is a three month splurge enough to kick over other parts of the economy and make a faster pace of growth self-sustaining? Can't hurt, but certainly the big set of short-term factors working right now makes it hard to tell.

Posted by: K Harris on August 13, 2003 06:03 AM
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