NY Fed Chief Urges Attention to Economic Headwinds

In remarks this morning to a business group on Long Island, New York Federal Reserve President William Dudley noted that while US economic growth had picked up in the fourth quarter of 2011, we’ve all seen this before:

… the economic data looked brighter at this point in 2010 and again in 2011, only to fade as we got into the second and third quarters of those years.

Dudley believes that warmer winter weather has reduced heating bills and contributed to the bounce in construction starts. He notes, however, that these factors are temporary:

[R]eal economic activity has yet to be strong enough on a sustained basis to make a big dent in the overall amount of slack in the U.S. economy. While it is true that growth was stronger in the fourth quarter, most of that growth was due to inventory accumulation. Growth of final sales was actually quite weak. Historically, a quarter in which inventory investment makes a significant growth contribution is typically followed by a quarter in which that growth contribution is modest or even negative. That appears to be what is shaping up for the first quarter of this year. …

While growth of retail sales in February was reasonably strong in nominal terms, it was considerably less impressive when the large increase of gasoline prices that occurred that month is taken into account. Based on data for the first half of March, gasoline prices are continuing to move higher which will further sap consumers’ real purchasing power. And growth of business investment spending, which was quite strong in the second and third quarters of 2011, entered the new year with little forward momentum.

To put the recent pace of growth into perspective, we believe that the economy’s long-run sustainable growth rate (what economists call the potential growth rate) is around a 2 1/4 percent annual rate. We need sustained growth above that rate to absorb the substantial amount of unused productive capacity. Thus, our recent growth rates are barely keeping up with our potential.

Dudley also commented on the unemployment (not as good as it looks perhaps), housing construction, and what he called “fiscal drag” at all levels of government. Dudley’s speech is available here.

Paul Ausick