Economic Growth for the First Quarter: Good Scenario for Bernanke

The year-over-year growth rate of real Gross Domestic Product came in just about as I forecasted. (http://seekingalpha.com/article/469671-gdp-growth-the-road-ahead-and-the-investment-climate)  The year-over-year growth rate was 2.1 percent.   In the previous post I argued that real growth over the next year or so would be in the 2.0 percent to 3.0 percent range where the growth would tend to be closer to 2.0 percent than to 3.0 percent.  

The basic analysis of this performance concluded that the consumer sector and exports did well.  Business investment, real estate investment and the public sector did not do so good.  A mixed outcome, but still to the plus side.   The economy is growing and, I believe, that there are signs that the balance of factors supporting more growth are tending to outweigh the factors working to the down side.

Furthermore, I believe that this scenario is a good one for Fed Chairman Ben Bernanke.  Economic growth is continuing although the reduction in unemployment is not as great as he would like it…and especially as some of his fundamentalists Keynesian critics would like it. 

However, economic growth is continuing and this is good.  It means that if economic growth continues in the 2.0 percent to 3.0 percent range, the Federal Reserve will not have to engage in any further monetary stimulus at the present time. 

Mr. Bernanke and the Fed are reluctant to engage in anymore quantitative easing at this time because any further effort to stimulate the economy at this time will have little or no impact on how the economy will perform before the presidential election this fall and the Fed stands to reap a great deal of criticism during the election season if it appears to be underwriting the campaign of the incumbent. 

The Fed is also comfortable that there are sufficient reserves in the banking system to allow for the smooth closing or merger of “sick” commercial banks without any significant disruption to the financial system.  Last Friday, the FDIC closed 5 commercial banks bringing the total for the year to 22.  This year only 1.3 banks are being closed each week down from 1.8 banks per week in 2011.  This, of course, does not consider the reduction in the number of banks in existence due to mergers taking place.

The Fed, I believe, will continue to believe it is doing its job if the economy continues to grow, even at a modest pace, and the financial system continues to absorb bank failures and mergers without undue difficulty. 

The modest rate of growth of the economy takes pressure off the Fed to combat potential inflation due to all the reserves it has pumped into the banking system.  Possible rising inflation is the big fear of the future, but this concern will put less pressure on the central bank if the economy is not increasing very rapidly.  The Fed could even accept inflation a little bit above its (implicit) 2.0 percent target range for a time given the slow rate of growth of the economy.

In addition, it seems as if there is now some “downside” protection against economic growth dropping to a lower level.  Business lending at commercial banks seems to be picking up. (http://seekingalpha.com/article/499921-loan-growth-continues-to-pick-up-at-commercial-banks) The Fed has been waiting for bank lending to increase given all of the reserves it has put into the banking system.  Now the rise in loans is taking place and this will only strengthen the growth of the economy in the near term. 

There are, of course, still potential “bumps in the road” that could dislodge this picture.  One of these “bumps” is the fiscal “cliff” that more and more people are talking about, that the United States government is going to have to face later on this year.  Right now, how this issue will be dealt with is anybody’s guess. And, the US election seems to be muting discussion of the problems to be faced. (http://www.ft.com/intl/cms/s/0/d0bcd2c6-9218-11e1-abdf-00144feab49a.html#axzz1tWdwU1tI) 

And, there is the continuing saga of the European sovereign debt mess still playing at your local theaters.  This and a second recession can have serve consequences for the United States and the world, let alone for Europe.

It is still my belief that we will muddle through all of this.  And, for the time being, the pressure is off Mr. Bernanke.  Bernanke is sitting in about as good a place as he could be for the time being.  Of course, the situation could suddenly change.  However, I believe that the economy will keep on, keeping on.  And, this will not be the worst of all worlds.