GDP increase supports FED’s decision

When the FED announced its FOMC decision on Wednesday, it announced a decision that had been alluded to for months.  US markets declined for the rest of the day, while money flowed into treasuries in spite of the FED pledging to keep rates low for the foreseeable future.  While some may see this as a negative sign, daily perturbations of the stock market aren’t the best gauge for economic growth and turmoil in emerging markets could also have played a factor.  Thursday’s release of 2013 fourth quarter GDP brought further evidence that the economy is getting better and supports the FED in their decision to reduce asset purchases.

The GDP of the United States went up at an annual rate of 3.2% in the fourth quarter of 2013, primarily due to an increase in consumer spending.   The largest decreases came from reductions in government spending, as well as residential fixed investment.  Considering the economy still grew, a reduction in government expenditures is not necessarily a bad thing, while cold temperatures and rising rates have put pressure on the housing market, dragging down residential investment.  The housing market is expected to rebound in the spring, as there is evidence of a seasonal downturn in the housing market in the winter months.  A graphic taken from the Wall Street Journal shows this nicely:

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As can be seen in the time series on the right hand side, the decrease in government expenditures has been somewhat of a trend.  Even more telling is that the economy still grew at the rate it did despite the government shut down, which could be the cause of majority of the decrease even though it appears that the shut down probably wasn’t even good for the predicted loss, though it set the country back in many other ways.  However,   not all sign point in the right direction though.

Inflation has proven elusive for the United States.  While many consider inflation a bad thing, the FED has made a case for why it targets 2% inflation.  The price index only increased by 1.2%, which is well below the target.  It may appear that the economy is able to absorb more stimulus and move closer to the target rate the FED has set, unemployment has been elusive as well, and is a bigger problem then .8% inflation.  Perhaps the FED thinks QE has done all it can for unemployment.

The GDP numbers released on Thursday where a positive sign for the United States economy.  Even though the government shut down had been predicted to have a large adverse effect, that effect may have been exaggerated.   The growth in GDP is an indication that even though the economy has been recovering slowly, and unemployment is higher then it we would like, the economy is might be picking up momentum.  It supports the FED’s decision to decrease asset purchases earlier in the week. The economy will need to continue this pattern of growth if it is going to return unemployment to a comfortable level.