Economy
2:57 pm
Fri July 27, 2012

Will A Slowing GDP Nudge The Fed To Do More?

The Commerce Department's latest report confirms that economic growth was as lousy this spring as you suspected it was.

Now the question is: Can anyone do anything to make it better in the year's second half?

Next week, the Federal Reserve's policymakers may take another stab at it. Many economists believe that when the Fed officials gather on Tuesday and Wednesday, they will start rummaging around in their bag of monetary tricks, looking for new ways to boost growth.

Lots of people would be cheering them on because they believe the recovery needs more stimulus. They want Congress to do more, too.

"Policymakers must act to provide more support to the economy if they want it to grow fast enough to start putting sustained downward pressure on today's still too-high unemployment rate," economist Josh Bivens wrote in his analysis for the Economic Policy Institute, a left-leaning think tank. The unemployment rate is 8.2 percent.

The Fed policymakers most likely will go over their math and start developing a new policy plan. But then they might hang back and delay action for another six weeks, some analysts say.

"The outlook is worse than the Federal Reserve's June projections, and as a result we expect to see another round" of policy moves to bolster growth, IHS Global Insight chief U.S. economist Nigel Gault said in his written analysis. "But we expect the Fed to wait until September to act."

What triggered the talk of new stimulus efforts was the Commerce Department's report Friday morning on second-quarter gross domestic product, the broadest measure of economic activity. Ideally, GDP would be growing at about 4 percent — fast enough to create jobs for the 12.7 million unemployed people who would like paychecks.

But just as most economists had predicted, growth advanced only 1.5 percent from April through June, down from the sluggish 2-percent pace set in the winter.

While those quarterly results were widely expected, the Commerce report did contain a bit of a surprise: It revised historical numbers to show the recession wasn't quite as bad as originally thought, thanks to government stimulus spending.

The government economists now say the GDP shrank 4.7 percent during the recession that stretched from late 2007 to the middle of 2009. That was less of a slide than the initial estimate of a 5.1 percent contraction.

Friday's revision was triggered by data showing that government spending and investment rose far more in 2009 than economists had initially measured.

Alan Krueger, chairman of the president's Council of Economic Advisers, wrote for the White House blog that the revised numbers prove the stimulus spending supported by the Obama administration in early 2009 had a "cushioning" effect that helped the economy.

Krueger said Congress should do more now to stimulate growth through White House-backed economic proposals. Republican lawmakers have very different proposals intended to spur private-sector growth. With the November election looming, Congress appears unlikely to reach agreements.

That leaves the Fed as the only stimulus player in town. It can help growth by pumping more cash into the financial system and helping hold down interest rates. But the central bank already has used a variety of techniques over the last four years to boost growth by lowering interest rates to historical lows and providing lenders with very large amounts of cash. Some question whether the Fed already has used up its best methods.

But the Fed policymakers have shown considerable creativity, turning to rarely used techniques to beat down interest rates. For example, last fall, the Fed helped squeeze down on home mortgage rates by launching "Operation Twist," a seldom-used strategy wherein the Fed sells its own shorter-term bonds and uses those proceeds to buy longer-term bonds. That puts downward pressure on long-term interest rates, which helps homebuyers.

The question now is: Having used one extraordinary measure after another for years, does the Fed still have the firepower to do more? Prices for both stocks and oil rose Friday as lots of investors came to the conclusion that one way or another, the Fed, as well as the European Central Bank, would find some way to once again stimulate growth.

Here's a guide to help you understand the jargon economists will be using as they discuss this latest report on growth.

gross domestic product \ gros də-mes-tik pra-dəkt \

Gross domestic product is the broadest measure of the economy. It adds up the market value of all final goods and services produced within the country. The Commerce Department measures GDP every three months. It provides an initial estimate, and then revises that number over coming months and years as more and better data become available. On Friday, the department said that in this year's second quarter, GDP rose at a 1.5 percent annual rate, sending the total up to $15.6 trillion. That's far slower than the 3.5 percent pace considered healthy.

revisions \ ri-vi-zhənz\

The Commerce Department does its best to measure GDP, but it's not easy because the U.S. economy involves $15.6 trillion and 314 million people. It takes time to accurately measure all of the economic activity of businesses and consumers, as well as local, state and federal governments. Initial estimates can be off, sometimes fairly significantly. For example, the latest GDP report finds the 2007-2009 recession wasn't as deep as originally thought because more recent calculations show state and local government spending was stronger than first estimated. So the revised measure now shows the Great Recession shrank the economy by 4.7 percent, not by the 5.1 percent previously reported.

stimulus \ stim-yə-ləs\

In the economic realm, stimulus refers to any public policy designed specifically to give the economy a lift. Stimulus can be provided by Congress via fiscal policy, which deals with taxes and spending, or by the Federal Reserve, which handles monetary policy. The latter involves setting interest rates and controlling the amount of money in the financial system. Ideally, the economy would be growing on its own momentum. But when growth stalls, Congress and the Fed typically try to stimulate an expansion through some combination of more government spending, lower taxes, increased cash flow and lower interest rates.

Copyright 2013 NPR. To see more, visit http://www.npr.org/.