Good News For A Change: Real GDP Revised Down

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?

 

Comments (11)

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  1. Tommy says:

    “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?”

    Sir, if you are perplexed, I am beyond perplexed. With my limited knowledge on monetary policy economics, I am not sure what drives these reactions within the market.

    • Sandy says:

      True. It’s quite hard to understand market volatility and what drives these decisions. I personally don’t like the way it works, we should be a little more mindful of the impact many of these decisions have on average Americans.

    • JD says:

      If they don’t understand it, how are we supposed to?

  2. JD says:

    Regardless, that is anemic growth.

  3. Howard says:

    I do not consider this to be good news at all. Never jump the gun on weak evidence.

  4. Dewaine says:

    “The markets continue to reveal a preference for good medicine for the economy to a good economy.”

    It keeps federal dollars flowing into the market. That’s good for those who can get their hands on it.

    • JD says:

      There may be something to this. A good economy would imply a certain level of regularity. A sick economy nursing good medicine could create wild swings that could generate huge profits.

  5. JD says:

    “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?”

    This is a good question that belies perverse incentives. Why wouldn’t market participants want to take advantage of a changing equilibrium? Maybe they are unsure of the changes or don’t trust the Fed’s influence?

    • Sandy says:

      Good questions. It is a little strange and potentially could be a level of distrust toward the influence of the Fed

  6. Hlyork says:

    Maybe the big stock market players have higher discount rates than you or I. This pushing off the equity bad news of QE coming to an end has less of an impact on their present value of their portfolio. I know that’s not true for me or my kids’ college fund accounts, but the market doesn’t care what the small fish think.