The third estimate of the first quarter real GDP came in at an annual rate of 1.8 percent, down from a second estimate of 2.4 percent and a first estimate of 2.5 percent. It looks as though our two percent growth economy is locked in. The U.S. stock market rose in response to this news, of course, since it is less consistent with an early end to quantitative easing. The markets continue to reveal a preference for good medicine for the economy to a good economy.
The subtraction of 60 basis points from the second to the third estimate is a larger change than we have had recently. It reportedly resulted from lower spending on legal services and health care than earlier estimated. Now that is good news of another sort.
I continue to be perplexed by the market’s response to the news that our central bank thinks things are improving, perhaps to the point that the outsized monthly purchases of $85 billion in bonds can be tapered off toward year-end and perhaps even ended by the middle of next year. Of course, the near-zero short term interest rates are promised to continue well beyond that time horizon. To me, this is good news, but, even if I thought it bad news, it seems premature to jump the gun so drastically. But the direction of the reaction doesn’t perplex me as much as the timing. If new information changes the prevailing view of the appropriate level of stock prices and interest rates, why do the markets move to the new appropriate equilibrium in fits and starts? Why wouldn’t the adjustment take place immediately after Chairman Bernanke spoke? Why does it turn into Chinese water torture?