The Markets: June 1, 2015

6.1.15

Is it possible to have an economic optical illusion?

On Friday, the Commerce Department reported the U.S. economy contracted at an annualized rate of 0.7 percent during the first quarter of 2015. The Federal Reserve sees things slightly differently.

Previously, the Commerce Department had reported our gross domestic product (GDP), which is the value of all goods and services produced in the United States, had increased at an annualized rate of 0.2 percent during the first quarter. The estimate was weaker than economists had expected and caused some analysts to wonder whether the economic recovery was stalling.

Weak first quarter GDP has caused other analysts, including those at the Federal Reserve Bank of San Francisco who penned an article entitled, The Puzzle of Weak First-Quarter GDP Growth, to wonder whether a statistical anomaly is causing first quarter GDP growth to appear weaker than it really is. Barron’s explained it like this:

“Since the expansion began in mid-2009, there have been six calendar quarters that have included the January-March quarter; for those six quarters, the average rate of growth has been just 0.4 percent. For the other 17 calendar quarters, growth has averaged 2.8 percent. One reason for this pattern seems to be faulty seasonal adjustment in the first quarter… In any case, if the same pattern persists in 2015, expect a rebound in the current quarter and through the second half of this year. And, based on data released so far, one source of the rebound would be a pickup in housing.”

The San Fran Fed report concluded, “There is a good chance that underlying economic growth so far this year was substantially stronger than reported.”

While GDP was revised downward last week, the core consumer price index (CPI), which is a measure of inflation that excludes food and energy, showed inflation increasing for the first four months of the year. If it continues apace, by year-end the CPI will rise above the 2 percent inflation target set by the Fed and will probably set the stage for an increase in the Fed funds rate.

Investors weren’t thrilled with last week’s news, and markets generally moved lower.

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