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Tags: Naroff | fed | economy | GDP

Naroff: GDP Numbers Soft, But No Threat of Another Recession

Friday, 27 July 2012 11:20 AM EDT

The U.S. gross domestic product grew 1.5 percent in the second quarter, according to an advance estimate from the Commerce Department, sluggish but strong to keep the Federal Reserve on the sidelines at least for now, says Joel Naroff, chief economist at Naroff Economic Advisors.

The number met expectations, which should put to rest concerns the Fed will feel compelled to stimulate the economy via a round of quantitative easing (QE), which are bond purchases by the central bank that pump liquidity into the economy to spur recovery and job creation.

“I think the Fed is very much aware that there’s not a whole lot that they can do by coming up with another QE. You know, we’re looking at a situation where the economy is obviously not growing very well, but at the same time there doesn’t seem to be any threat that the economy is going to move into a recession,” Naroff tells CNBC.

Editor's Note: Economist Unapologetically Calls Out Bernanke, Obama for Mishandling Economy. See What They Did

“This kind of growth rate is soft, but there are other factors out there that the Fed can’t change. The Fed’s not going to change the problems that are being created by the fiscal cliff and the lack of confidence that that is causing,” Naroff adds, referring to the so-called fiscal cliff, a combination of tax hikes and automatic cuts to government spending that kick in on Jan. 1, 2013, that if left unchecked, could siphon over $500 billion out of the economy next year and send the country back into a recession.

Fed officials have said they remain ready to intervene with QE should the economy deteriorate.

Supporters of QE say the tool steers the country away from deflationary decline and creates a wealth effect that pumps up stock prices and encourages investment and hiring.

Critics say the move is printing money out of thin air that sows the seeds for inflation down the road.

Since the economy slid into a recession over four years ago, the Fed has rolled out two rounds of QE, referred to as QE1 and QE2, buying $2.3 trillion in mortgage-backed securities and Treasury securities from banks in the process.

The U.S. central bank has also rolled out a $400 billion program that shuffles its Treasury holdings, known as Operation Twist, later expanding it by another $267 billion.

Under Operation Twist, the Fed purchases longer-duration Treasury securities in the market while selling an equal amount of shorter-duration Treasury securities with the aim of keeping interest rates low.

The economy has seen some improvements in recent months, including improving demand for services, which represents a big portion of total U.S. economic output.

“That’s been the missing link in this whole recovery,” Naroff says.

“It’s 65 percent of spending and 45 percent of the economy — that’s beginning to come back.”

The service sector of the economy grew 1.9 percent in the second quarter, according to the government’s GDP data.

Editor's Note: Economist Unapologetically Calls Out Bernanke, Obama for Mishandling Economy. See What They Did

“Right now, unless we see that this economy falters further in the third quarter, I don’t see why the Fed has to do a whole lot. They can continue the Twist program if they want to,” Naroff states.

“I don’t see any sort of QE3 coming down the pike and that’s all I’m expecting them to say when they meet.” The Federal Open Market Committee is scheduled to meet July 31 and Aug. 1.

Still, the GDP numbers indicate the economy is far from charging ahead on its road to recovery, other experts point out.

“It’s not far off economist expectations but I think it’s disappointing for the future of the economy,” Glenn Hubbard, former chairman of the Council of Economic Advisers and dean of the Columbia Business School, tells CNBC.

“We’re likely to see another middling employment report. When you have GDP growth so sluggish it’s hard to have a vigorous employment recovery. It’s got to be about growth,” he notes.

The government revised first-quarter GDP figures up to 2 percent from 1.9 percent.

Other experts point out the Fed could roll out a third round of easing, which would send stocks rising and the dollar weakening, though such a policy wouldn’t make much of an impact.

Fed stimulus tools work by lowering interest rates, though borrowing costs are already low across much of the economy.

Most Americans are paying off debts and not spending.

“The Fed may unleash another round of QE soon, but the real question is how much positive impact it will have amid a backdrop of ongoing household deleveraging,” says Kathy Bostjancic, an economist at the Conference Board, according to Reuters.

Editor's Note: Economist Unapologetically Calls Out Bernanke, Obama for Mishandling Economy. See What They Did

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Friday, 27 July 2012 11:20 AM
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