FED CONFRONTS AN
ECONOMY
PLAGUED BY MISMEASUREMENT
Samuel
Corum/Anadolu Agency/Getty Images
A note from Goldman Sachs economist Jan
Hatzius this weekend touches on a theme that seems to be getting a lot of play
of late in the world of central banking: Mismeasurement.
Do we really know the world economists are
trying to describe to us on a daily basis? And if we don’t, are central bankers
in any position to feed this world appropriate amounts of money and interest?
Goldman’s note raises questions about
measurement of productivity, growth and inflation.
“Structural changes in the US economy may
have resulted in a statistical understatement of real (economic) growth,” Mr.
Hatzius argues.
The data, he says, might not be picking up
changes in the economy resulting from the rapid spread of advanced software and
digital content. Inflation statistics, moreover, might not grasp the leaps in
quality of, say, the camera on your iPhone. My camera, for instance, can capture
my dog catching a ball in slow motion, which is very cool and something I’ve
never been able to do before. Mr. Hatzius argues inflation, growth and
productivity statistics have been understated because the data don’t pick up
the consequences of this technological change.
“Confident pronouncements that the standard
of living is growing much more slowly than in the past should be taken with a
grain of salt,” he says. Mr. Hatzius, often a dove when it comes to monetary
policy, adds further that overstated inflation means the Fed can keep interest
rates low.
In other corners right now, economists are
debating whether seasonal adjustments in data tend to bias down growth
estimates for the first quarter. In addition – in the search for better
measures of growth — San Francisco Fed President John Williams and
economists at the Philadelphia Fed are touting a new
measure of output called “GDP Plus,” which tracks not just growth in output of
goods and services, but also the incomes Americans earn from that output.
Given the doubts about growth and
productivity statistics in particular, in can be argued – and I suspect it will
be among Fed officials in the months ahead – that the central bank needs to be
most focused right now on what is its congressionally required mandate. That is
not growth. It is inflation and employment.
Is inflation rising at the modest pace
officials want and the job market improving? On this front, the data are not
all that discouraging. The consumer price index, released by the Labor
Department Friday, showed some signs of pickup. Meantime the jobless rate, at
5.4% in April, continues to fall and hiring continues.
In a world where there is much they don’t
know, that set of facts keeps Fed officials hopeful they are getting the
economy back to something they’d like to call normal. And that means they
remain inclined to move interest rates away from the very abnormal level of
zero.
-By Jon Hilsenrath
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