"Kee" Points with Jim Kee, Ph.D.

US Economy: The third quarter annualized GDP (gross domestic product) growth rate for the US was revised upwards last week to 5% by the Bureau of Economic Analysis. This is the “third estimate” released by the BEA, which revises initial estimates as more complete data becomes available. The initial or “advanced estimate” occurs at the end of the month following the quarter. Since the third quarter ended in September, this initial or “advanced estimate” was released late October (30th), and it was 3.5%. The “second estimate” was released in November (25th) as more data became available, and that number was 3.9%. The “third estimate,” released last week, came in at 5% - the first 5% number since 2003. That won’t last, of course, as the individual GDP components can be very volatile, creating upswings and downswings. In fact, one quarter’s GDP growth rate has very little predictive ability as to what the next quarter’s growth rate will be. But the important piece of information about this 5% third quarter is that a lot of the revision was driven by a category called “personal consumption expenditures” (PCE), particularly the services PCE, which has been weak during this expansion (which began in 2009) relative to other expansions (Deutsche Bank). The goods PCE (as opposed to services) was also revised upwards. This is good news in that it points to a broader, more sustainable recovery, which is particularly important now as the rest of the world struggles. Most estimates for next year’s (2015) GDP growth that I see are in the 2.5% to 3% range. By the way, the BEA produces a “comprehensive” revision of its GDP statistics once every 5 years.

 

Rest-of-the-World (ROW): Rarely do I come across as succinct of a summary of world conditions as was recently published in the Dallas Fed’s International Economic Update. Briefly, the third quarter world output growth slowed to 2.8% year-over-year, with the advanced economies growing at 1.5% (2.8% for Canada and the UK) and the emerging economies growing at 4.2%. Third-quarter GDP growth in the Euro area came in at 0.6%, which was  slightly better than expected, and sluggish growth there is predicted for 2015. Japan is in a recession. China’s growth rate slowed to 7.3% in the third quarter, the weakest in 5 years but was above expectations. Lower oil prices should benefit oil importers like the US, China, and Japan, and hurt exporters like Venezuela, Russia, and Iran (Dallas Fed). As mentioned previously, the overall impact of lower oil prices depends upon whether they are primarily demand-driven (bearish) or supply-driven (bullish). The Dallas Fed (and others) sees the current decline as predominately supply-driven. Finally, regarding the strong dollar, it has led to a 9.4% appreciation of China’s currency (Renminbi). That is one of the reasons for the recent People’s Bank of China (PBOC) deposit and lending rate cuts and other measures intended to increase liquidity and lending (such as lowering reserve requirements).

 

My thoughts on the global scene going forward are that monetary policy responses will limit the downside, but that the lack of good fiscal reform – i.e, policy responses on the fiscal side - will limit the upside.