With U.S. monetary policy in the spotlight, many investors have their eyes glued to the same economic indicators that the U.S. Federal Reserve is watching: unemployment and inflation, both of which are meandering toward targets established earlier in the year. Unemployment is trending lower and inflation is trending higher, and according to Fed projections the economy looks like it is one to two years away from a reasonable definition of “healthy.”
But the implications of different economic indicators over the past several months have bled together and painted a fairly gray picture of the U.S. economy. Consensus estimates from Fed policymakers suggest that while conditions may be improving, the data have no shortage of modesty. The most recent Employment Situation report showed a 0.2 percentage point reduction in the headline unemployment rate to 7.4 percent, which is encouraging, but it also showed effectively no change in the number of long-term unemployed Americans.
Gross domestic product grew faster in the second quarter than economists had anticipated, but growth was still relatively anemic at an annualized rate of 1.7 percent; it followed downwardly revised growth of 1.1 percent in the first quarter. Measures of consumer spending and consumer confidence by Gallup have also come in weak over the past two months.
Inflation indicators suggest that despite the Fed’s massive and ongoing asset purchase program, the economy isn’t heating up as much as some economists would like. On Tuesday, the Bureau of Labor Statistics reported that export prices fell 0.1 percent on the month in July while import prices increased 0.2 percent. This compares against expectations for a 0.2 percent increase in export prices and a 0.9 percent increase in import prices. Both import and export prices declined in June.
Import and export price movement is not a core part of the deflationary argument, but it is icing on the cake. Combined with low or negative price movement in other indicators like the producer price index, inflation — instead of unemployment — may be where the Fed focuses its attention during the next Federal Open Market Committee meeting. Minutes from previous meetings show increasing concerns about deflationary pressures among some Fed members.
In his last testimony before Congress, Bernanke argued that “accommodative monetary policy has also helped to offset incipient deflationary pressures and kept inflation from falling even further below the committee’s 2 percent longer-run objective.” The comment underscored an increase in the personal consumption expenditures index — the Fed’s favored inflation indicator — of just 1 percent over the past 12 months.