GDP growth still positive; Bernanke & Co. meet today

The first estimate for real GDP growth over the first three months of 2008 came out today. The economy is hanging in there with a 0.6 percent growth rate. Recall the rule of thumb for a recession is two quarters (six months) of negative growth. We have not seen that yet.

In a related note, the FOMC is meeting today (the meeting started yesterday). In your presentations, many of you advocated another rate cut (especially those of you who focused on manufacturing and the housing industry), though I would say most groups called for either a rate increase, or to hold the Federal funds rate target steady (to let the lag effect from previous cuts play out). Given recent attention on gas and food prices, that may be the right call.

So how do you interpret this latest real GDP growth rate? Some might say it's further sign of trouble; some might say that it is good news, and the rate cuts that FOMC made in the Fall are working. What do you think?

Blog Contributions . . .

A couple of astute 437 students noted some "blog-worthy" articles recently. 2/C LaBossiere saw this article on the effects of "Globalization" on Fed policy. This is particularly appropriate given the recent presentations on the value of the dollar and Fed policy--especially 2/C Johnson and 1/C Kuhar-Pitter's discussion of the relative policy of the European Central Bank.

In addition, blogging veteran 1/C Ryan noted this article on defense (Go Navy!) spending. 1/C Ryan was apparently inspired by 1/C Gragg and 1/C Meek, who's presentation helped us understand that defense appropriations may certainly matter for how or if the Fed responds to changes in short run economy.

437 Analysis Part III

Friday's first section provided a variety of issues and data to consider. 2/C LaBossiere and 2/C Holder gave us case studies of New York and Maryland. Both states rank in the top five of highest per capita income and represent something about housing and economic conditions over-looked recently--their economies (at least in 2007) were both somewhat vibrant. Maryland's home prices still grew in 2007--which stands in contrast to Florida (which we learned on Wednesday). The 2/C duo also pointed out that only a handful of states in the U.S. were actually experiencing recession-like conditions; they recommended holding rates steady to see how things play out (with the recent cut FFR) over the next few months.

1/C Meek and 1/C Gragg offered us a unique look at defense spending--in particular, that the errors in annual forecasts of defense spending are typically 2/5 percent of GDP in a given year. 2.5 percent of our economy! As the team pointed out, such a poor forecast matters for the FED--how are they to anticipate shifts in the IS curve, for example, if they have to consider errors of this magnitude? Truly fascinating.

1/C Tumminello and 1/C Fancher offered some regression analysis of the term structure. They noted that in a regression of the 30 year mortage rate on various lags of the Federal funds rate, the notable action takes place 2 to 4 quarters out. Not surprisingly, we see the mortgage rate is
less volatile than the Federal funds rate over the last few decades.
Lastly, Rob and Kyle lampooned a few of your Econ professors.
Much appreciated, guys. It's good to know a semester's worth of discussing monetary policy, and two-years taking econ courses has boiled down to a cereal cartoon.




In the next section, we saw more regional studies, with 1/C Watt and 1/C Wimsatt telling us about Texas, and 2/C Martinez and 2/C Hymen discussing Florida. 1/C Branchal and 1/C Alonso took a different tack and talked about the Dow Jones Index. The latter group offered the argument the DJIA is a good leading indicator of the economy and it would be worth the FOMC's while to heed it's information. Given the recent declines seen in the DJIA they argued the FOMC needs to bring the FFR up to at least 3 percent sooner rather than later.

2/C Martinez and 2/C Hymen highlighted the plight of the Florida construction industry, noting that 20 percent of all employment in the state is in that industry (compared to 10 percent for the national average). Alarmingly, supply is still increasing resulting in a rise of vacancy rates from 1.7 percent in 2004 to 5.1 percent in 2007. They call for further rate cuts to help fill those empty units.

1/C Watt and 1/C Wimsatt tackled the state of Texas, reporting the Lone Star State represents 8 percent of U.S. GDP. They noted that while unemployment in the state fell over 2007, recently it has increased--is this an indicator for the national economy? Housing conditions in both Houston and Texas peaked in the mid-2007, with prices and housing starts declining steadily since. Despite such troubles, the duo suggested the FOMC hold rates steady--Texas is well-tuned to inflationary pressures that come from the energy sector. Like the President of the Dallas Fed, these two are hawkish on inflation.

Monday will be our last day of presentations and our last day of class!

437 Analysis Part II

Day 2 of our collective analysis provided further insight and informational gems . . .

Auto sales were the topic of choice for both 1/C Stolle and 1/C Yonkman and 1/C Visgauss and 1/C Sotelo-Moreno. Notably, the US auto industry has been in steady decline. Though the 1990s buoyed the "Big-3"'s fortunes for a time, auto sales of US made cars have been declining steadily since 2000. The largest decline has come for the Big 3's specialty, large cars and SUVs. Visgauss and Sotelo-Moreno suggest the Fed should keep the federal funds rate low in light of the automakers' struggles.

2/C Moyer and 2/C Dorsch then offered us a picture of the housing in the southern United States. Florida stands out among the south; new homes sold peaked in the Sunshine state in mid-2005, and have been steadily declining since (other states such as Georgia and North Carolina have been somewhat steadier). They suggest keeping the federal funds rate at its current low level of 2.25 to let the lag effects inherent in the transmission mechanism play out.

In the next section, both 1/C Kuhar-Pitters and 2/C Johnson and 1/C Marshall and 1/C Shaughnessy discussed the value of the dollar and the trade balance. Both groups noted the serious decline in the value of the dollar relative to the Euro (now only 62 cents per Euro). While exports have been increasing over the same period, imports have also been increasing at least since 2004 (though Net Exports has been increasing overall). KP and Ms. Johnson suggested the FOMC should start raising rates before the dollar falls any lower.

Lastly, 1/C Ahuja and 1/C Gieszl offered a case study of Arizona's economy. Dependent on labor-intensive agriculture and construction, the state offers a focused look at some of our national troubles. In particular, housing starts in the state have declined by 37 percent , where only a couple years ago they grew by 23 percent. The unemployment rate has risen, too. Undaunted by the plight of his home state, 1/C Gieszl suggested the FOMC raise rates in their next meeting.

Our own Economic Analysis begins . . . .

Today marked the first day our our collective data analysis. The ultimate goal? To draw our own conclusion on the current state of the economy and to offer the FOMC a suggested policy decision. Here's what we have so far

2/C Backer and 1/C Ryan reported on the State of California--as Arnold's state goes, so goes the rest of the U.S.? The duo reported that the state gross product of CA is almost 14 percent of the GDP for the entire U.S. Also, they noted that while CA construction was robust during the last recession the construction market has declined dramatically since 2006 (and unemployment in CA has spiked in 2007). Their analysis of the 1991 recession with respect to changes in the Federal Funds rate suggests that recent rate cuts may not help the economy until 2009.

1/C Gilchrist and 2/C McCartney offer a comprehensive picture for the U.S. housing market. Consistent with Backer and Ryan, their multiple housing statistics show the housing market began it's decline sometime in the second half of 2006. Most alarming, vacancy rates for new homes have spiked (to approximately 20 percent), well above the historical average. They appropriately noted the implications of these declines for both the Tobin Q and wealth effect aspects of the transmission mechanism. They think the worst of the housing decline is behind us and it may be time for the Fed to worry more about inflation.

1/C Fannin and 2/C Oldenkamp provided a look at the term structure of interest rates. Over the last thirty years, the thirty year mortgage rate averages 3 percent above the federal funds rate. Their regression analysis showed that a change in the federal funds rate is a strong predictor of the mortgage rate (though they noted that with respect to raw correlations, the two series moved in opposite direction 40% of their period of observation).

In the next period, 1/C Tony and 1/C Dela (both with last names too difficult to spell in this space) provided a break down of GDP growth and its components. They provided a quarter by quarter break down going back for 2007. The key feature was the overall decline during the fourth quarter of 2007. The primary culprit was investment spending, which showed a negative growth rate, while the other three sectors kept GDP growth above zero (with Net Exports rising the most). Though Tony and Dela, worried about energy prices, suggested it may be time for the Fed to raise rates.

The last group of the day, 1/C Ward and 1/C Natter examined the correlation of the Wilshire 5000 index and the rest of the macro economy. They concluded that if the Fed's recent rate cuts are working on the economy, this is not evident in the behavior of the Wilshire index. Though they offered the caveat that this lack of response in the index to recent Fed moves may be indicative of the transmission lag of policy--it may be a few months or a year before the index reflects improving macro conditions (and the Fed's role in stimulating that improvement).

Overall, a very interesting picture emerged from the first round of reports. More to come on Wednesday.

Inside the mind of Chairman Bernanke

Like his colleague, Governor Mishkin, Chairman (and Professor) Bernanke has a long pedigree as a leader in monetary policy research. Our current understanding of various asset price and credit channels in the transmission mechanism is in large part due to his efforts over the last 25 years.

A couple notable articles include this one on the Credit Channel and this one on the Great Depression.

Again, understanding the Chairman's background and beliefs about how monetary policy works should allow you some "insider" information into what move the FOMC may make next.

Inside the mind of Governor (and textbook author) Mishkin

The author of our textbook, and Federal Reserve Governor, Frederic Mishkin is particularly interested in the role of housing in the transmission mechanism of our favorite scholarly pursuit--monetary policy.

He has a very recent paper on the importance of the housing market with respect to various transmission channels. Why is getting inside the mind of Governor Mishkin useful for forecasting monetary policy?

By the way, he has plenty of other research interests, including inflation targeting.