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GDP Release Adds to Speculation of Further Fed Easing

Posted January 26, 2012 | Categories: Hawaii's Economy, Q&A
Q1. There has been a large amount of economic news this week, can you summarize where things stand?

A1.  This was a busy week.  On Tuesday we found out that Hawaii's unemployment rate rose to 6.6% in December;  on Wednesday the Federal Reserve released their forecast for the US economy and new forecasts of what their policy will look like for several years; and this morning the BEA released data on 4th quarter US economic activity. 

Q2. Lets start with the most recent news, the GDP report.

A2.  The advance release from the BEA estimates that Real GDP grew by 2.8% (annualized) during the fourth quarter  up from an anemic 1.8% in the 3rd quarter of 2011.   Unfortunately,  most of that growth was due to inventory accumulation, which means business will not have to produce as much (and hire as many workers) in the future as they can sell out of inventories.   Overall this was a fairly weak report, and  few economists expect growth to remain this strong  during 2012.  For instance, the FED revised its 2012 GDP forecast downward to a range of 2.2 to 2.7% during its meeting this week.

Q3. You mentioned that the FED released a forecast of its policy plans. Tell us what that means.

A3.  To better communicate its policy position,  the Federal Reserve Board has begun to release the forecasts of Federal Open Market Committee meeting participants (12 Federal Reserve Board Presidents plus the seven Governors) for the future path of the Fed Funds rate.  The majority of participants forecast that the Fed Funds rate would remain unchanged in 2012, with only 2  forecasting that the funds rate would be raised to 1%.   These new forecasts tell us that FOMC participants expect the overall economy to remain relatively weak at least for the next two years so that short term interest rates probably won't begin to increase  until sometime in 2014.

Q4. Thats not very positive, is there anything the FED can do about this?

A4.  Given the weak GDP report, including the low inflation numbers in that report, we will likely see new announcements from the FED in March or April detailing additional "quantitative easing".  In other words the FED will purchase more long-term assets in an effort to drive down long term borrowing costs.  We could yet see mortgage rates move even lower.

Q5. Quickly, why is Hawaii's unemployment rate increasing while the US unemployment rate is falling?

A5. Hawaii's labor market improved fairly steadily from the Summer of 2010 through the Spring of 2011. But beginning in June 2011, the Unemployment rate started rising again as the number of employed persons declined by nearly 800 per month for the second half of 2011. The most likely explanation is the Pause in Hawaii's growth that we described in our Q4 forecast report. The impact of the Japanese Tsunami, rising oil prices, airfares and room rates, dismay over the gridlock in DC and later the debt downgrade.

-- Carl Bonham


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