EDITOR'S NOTE
Did you know that GDP grew by almost 8% last quarter? It sure did. But almost 6 points of that were higher prices. Which is why all you saw in the headlines was that GDP (in real terms) posted only 2% growth.
Why does this matter? Because, according to MKM's Michael Darda, high nominal growth means (a) the "shock" the economy is experiencing is a demand-driven shock; (b) growth is on a much faster trajectory now than it was last cycle; and (c) the Fed is likely behind the curve, keeping policy too loose rather than too tight. Oh, and (d), it means the risk of a recession is still pretty low right now (until the Fed has to play catch-up).
I say all this because of growing concerns about slowing U.S. growth. Bond yields have been dropping again, the longer part of the yield curve is "inverted" if you count the 20-year versus the 30-year yield (granted, no one really does), and consumer confidence took a big hit in recent months.
But does all that mean the Fed shouldn't taper? Not according to Darda (and most people's common sense). It means they absolutely should, and perhaps that they even ought to raise rates if it helps tighten monetary policy conditions. After all, "real" rates are still in historically negative territory; the 10-year TIPS yield is still at -1%, where it's been since the middle of last year. That means "policy is getting more, not less, accommodative," Darda explains. More accommodative!
"The [yield] curves that actually predict recessions have been steepening," Darda writes, referring to the 3-month versus the five-year Treasury yield, for instance. Longer-dated yields, he argues, are too influenced by central bank purchases. The five-year Treasury currently yields almost 1.2%, versus just 0.05% on the three-month bills. That's a vastly different picture than the inversion that curve saw before the pandemic.
"If the Fed's policy rate [stays] below its natural level," warns Darda, "the money stock should continue to grow faster than the demand for it at prevailing wages and prices, sustaining inflationary pressures." One sign of this, he says, would be if nominal GDP rises above its pre-Covid growth path, which it's already pretty much back on.
And that's what makes the surge in nominal GDP last quarter so relevant--that 8% figure I mentioned. "Sustained fast NGDP growth means the stance of policy is easy (or has been easy), whereas slow NGDP growth means it is tight (or has been tight)," writes Darda. Last cycle, in the slow 2010s, NGDP averaged just 4% annually; in the past five quarters, it has surged at an average 15% annualized pace.
If I had to boil this all down, I'd say it means watch nominal GDP from here on out if you want to know where inflation is going and what the Fed should do next. Above 4% means these inflationary and supply chain pressures won't dissipate any time soon. The current (fourth) quarter is running around 7% nominal, and I'd love to see more economists report this figure in their estimates, and not just "real" GDP.
All told, the biggest challenge we still face appears to be that of an economy running "too hot," not "too cold."
See you at 1 p.m!
Kelly
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Jumat, 29 Oktober 2021
Watch nominal GDP
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