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Tags: economy | growth | america | usa

BofAML: The US Economy's 'Moment of Truth' Has Almost Arrived

Monday, 27 July 2015 10:40 PM EDT

On Thursday, some of the biggest lingering questions about the U.S. economy may be answered, according to Bank of America Merrill Lynch Deputy Head of U.S. Economics Michelle Meyer and U.S. Economist Alexander Lin.

The Bureau of Economic Analysis (BEA) is slated to release the advance estimate for second-quarter growth that morning, for which the consensus estimate is 2.7 percent, along with revisions to GDP growth for previous years and a new metric that may offer a more accurate reflection of the nation's economic performance.

As such, Meyer and Lin referred to Thursday morning as the American economy's "moment of truth."

They expect we’ll learn that U.S. growth has been smoother and stronger than previously thought.

“This will likely leave the Fed comfortable arguing that the economy is making progress closing the output gap, allowing a gradual hiking cycle to commence,” the economists concluded.Slow Starts

Economists at the big banks, Federal Reserve, and regional Fed banks have debated whether the tendency for Q1 GDP to be much softer than subsequent quarters is primarily due to an insufficient adjustment for seasonal factors.

As part of these annual revisions, the BEA will be improving the seasonal adjustment of certain GDP components, acknowledging that “it is aware that its approach to the measurement of GDP introduces the potential for residual seasonality.”

“Going forward, this should reduce, but may not eliminate, the tendency for GDP to be weaker in 1Q,” wrote Meyer and Lin.Poor Productivity

GDP growth is the product of growth in hours worked and productivity growth. Robust payroll growth and relatively steady average hours worked have propelled total hours work higher at a solid clip in recent years. Conversely, productivity has increased at an annualized rate of just 0.5 percent over the past two years, Meyer and Lin observe.

During a recent speech in Cleveland, Fed Chair Janet Yellen deemed recent productivity data to be “disappointing” and said it may offer a partial explanation for subdued wage growth.

According to Meyer and Lin, “Although it is hard to say with any certainty, we believe GDP growth is likely to be revised up modestly."

If GDP for previous years is indeed revised higher, productivity will receive a similar-sized boost, judging by the magnitude of revisions  to each of those metrics over the past five years. This may alleviate some of the Fed and private sector economists’ concerns about the weakness in this segment.

A Fresh Goalpost for Growth

GDP, the most commonly cited figure of economic activity, and gross domestic income should be identical. The former is a measure of the value of the goods and services produced by an economy during a given time frame, while the latter is a sum of the income received by individuals and corporations.

However, due to differences in the source data and measurement issues, GDP and GDI can experience notable divergences.

Because of this, Bank of America's economists quipped that GDI is GDP’s “brother from another mother.”

And over the past few years of the American economic recovery, this brother has proved to be the stronger of the pair:

The economists explained the implications of this trend:

The stronger trend in GDI suggests that the economy has made more progress in closing the output gap and removing excess slack than implied by GDP. We can run a simple simulation showing the output gap, as a percent of potential, for GDP vs. GDI, based on the current figures. The output gap for GDI is smaller than for GDP. This would imply greater capacity for inflationary pressure to build and perhaps a faster hiking cycle. This goes to show you the importance of looking at alternative indicators. To avoid that choice, the BEA will begin releasing a composite of GDP and GDI, which will be the simple average of the two.

The economists wondered whether this new metric, which will show a stronger trend for growth in light of the outperformance of GDI, could “take the spotlight away from GDP."

© Copyright 2023 Bloomberg News. All rights reserved.

On Thursday, some of the biggest lingering questions about the U.S. economy may be answered, according to Bank of America Merrill Lynch Deputy Head of U.S. Economics Michelle Meyer and U.S. Economist Alexander Lin.The Bureau of Economic Analysis (BEA) is slated to release...
economy, growth, america, usa
Monday, 27 July 2015 10:40 PM
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