Revised GDP figures offer hope for final three months of 2011
By Neil Irwin,
The U.S. economy grew more slowly in the summer than earlier thought, according to new data. But the reason could bode well for the final months of the year.
Economic activity, as measured by gross domestic product, rose at an annual rate of only 2 percent in the July-through-September quarter, not the 2.5 percent that the Commerce Department estimated late last month.
The revision, however, stemmed from businesses running down their inventories by $8.5 billion, which means that the nation’s factories may need to ramp up output to meet demand for their products. Revised figures for final sales, which reflect growth excluding inventory fluctuations, remained the same as originally estimated.
The new numbers on GDP, the broadest measure of U.S. economic activity, depict an economy that is growing steadily but not regaining the ground lost during the 2007-2009 recession. That is also what leaders of the Federal Reserve concluded in deciding at their meeting three weeks ago to forgo any new steps to boost economic growth.
According to minutes of the meeting released Tuesday, the Fed officials saw evidence that “economic growth had strengthened somewhat” and that retail sales data “were somewhat stronger than expected,” but they also reported that their business contacts were “cautious and uncertain about the economic and political outlook and so remained reluctant to hire or expand capacity.”
Fed officials discussed — but rejected — major changes in how the central bank manages the nation’s monetary policy, including setting targets for the country’s overall economic activity, according to the minutes.
Even after the revision, third-quarter GDP growth was the strongest yet in 2011. The fourth-quarter number is on track to be even higher, around 3.2 percent, according to projections by Macroeconomic Advisers. But Europe’s debt crisis poses considerable risks to the U.S. economy.
“Although the downward revision to third-quarter GDP growth was disappointing, it does not change the outlook for the U.S. economy,” Gus Faucher, an economist with Moody’s Analytics, said in a report.
A few Fed policymakers on the Federal Open Market Committee had argued at the Nov. 1-2 meeting that the central bank should take additional steps to boost growth, according to the minutes. One board member, Chicago Fed President Charles Evans, dissented from the decision because he wanted new action.
But the minutes contained no suggestion that the Fed is preparing to bolster the economy by easing monetary policy, for instance through purchases of longer-term bonds or mortgage-related securities.
“All told, the minutes show a clear easing bias at the Fed, but do not suggest imminent further action,” said Michael Hanson, an economist at Bank of America Merrill Lynch.
The committee concluded that any new steps to pump money into the economy would be more effective if there was also a new strategy for how the Fed communicates its goals to the public. There was no apparent consensus, however, about what this strategy should be.
Members considered detailing the specific improvements they’d like to see in GDP growth — an approach that some economists outside the Fed have advocated. According to the minutes, simulations tracking nominal GDP showed that the strategy “could, in principle, be helpful in promoting a stronger economic recovery.”
But “a number of participants expressed concern that switching to a new policy framework could heighten uncertainty about future monetary policy, risk unmooring longer-term inflation expectations, or fail to address risks to financial stability.”
The Fed officials warned that the board would face “significant challenges” in planning a new strategy, such as setting that target level, the minutes said. The board then “agreed that it would not be advisable to make such a change under present circumstances.”
The minutes make clear that Fed leaders debated a range of alternatives to the way they manage the nation’s monetary policy — now gathering eight times a year and tweaking interest rate policies according to how the economy has evolved since their last meeting.
They discussed, in particular, the “potential merits and pitfalls” of laying out their specific economic goals, such as the unemployment rate or inflation level that might prompt them to raise interest rates.
Evans has advocated doing exactly that, clarifying those target rates for investors and policymakers. But “many” Fed officials at the meeting expressed concern about how to carry out the change, in part because “the benefits would be diminished if the strategy was not fully credible.”
There appeared to be greater support for announcing more details about what Fed leaders expect their interest rate goals to be in the future. For example, if they projected that the current policy of ultra-low interest rates would be in place for three more years, markets would probably adjust accordingly and thus lower the cost of borrowed money across the economy, encouraging growth.