Real GDP has grown at a 4 percent annual rate ever since the second quarter of 2003, when marginal tax rates were reduced on dividends, capital gains and human capital (professional and managerial salaries). Real GDP from nonfarm businesses did even better – rising at an annual rate of 4.7 percent. Some call that a coincidence.
What has been most surprising is that the economy did so well despite the burden of increasingly expensive imported oil. Part of the answer is that U.S. exports have grown very rapidly -- particularly exports of manufactured and farm goods rather than services. Since the third quarter of 2003, real exports of goods have increased a 9.7 percent annual rate, while imports of goods (including oil, of course) increased at a 9.2 percent rate.
The GDP report contains a useful measure of inflation which minimizes the use of estimates and is instead “based on household expenditures for which there are observable price measures.” It is called Market-based PCE (personal consumption expenditures).
With energy and food included, the market-based PCE rose at 3.9 percent rate in the third quarter of 2005, 2.6 percent in fourth quarter and 1.7 percent in the first quarter of 2006. The “core” version, without food and energy, was 1.5 percent in 2004, 1.7 percent in 2005 and 1.6 percent in the most recent quarter. Food is essentially irrelevant -- energy alone is what creates the statistical illusion of inflation (such as that 3.9 percent annualized figure in the third quarter).
Aside from the relative price of energy, I have yet to see anyone present any evidence of higher inflation. I have seen many words about higher inflation, but no facts. The consumer price index less energy rose 2.2 percent in 2004 and 2005 and it also rose 2.2 percent for the 12 months ending in April. The April PPI was only 0.8 percent higher than a year before.
Rising energy costs do reduce real wage growth and squeeze profit margins in energy-gobbling industries. Yet U.S. business has been coping surprisingly well.
If it ain’t broke, don’t ask the Fed to fix it.