Growth in the second quarter and free money supply

Publié le par Jean-Pierre Chevallier

The GDP growth in the United States in the second quarter was much stronger than I predicted it: + 3.4% (from a quarter to another in annualized rate) instead zero growth, but only 1.8% year-on-year, which is lower than the optimal potential (3.5%). I based myself on the variations of the monetary aggregates and other indicators which all are concordant. Indeed, the consumer expenditure increased little: + 1.3%.
Taking into account imports, the domestic demand was weak, which corresponds to my predictions and the weak growth of many companies in their only activities in the United States.
The growth was strong initially thanks to American exports which were very high: + 6.4% (planes of Boeing, engines of Caterpillar, etc), that companies of the emergent countries buy.
In addition, the governmental expenditure made a jump, in particular the military investments: + 9.5%! The wars in Iraq and Afghanistan and the war risks elsewhere dope the American growth…
As this growth is exogenous, it was thus not predictable by the variations of the monetary aggregates.
However, reality is there: the high rates of the Fed create a deceleration of the growth which is noted in the variation of the monetary aggregates.
The situation is paradoxical: the companies make large profit, but the endogenous growth is almost at zero, which disturbs the markets and creates a very great volatility.
The deceleration of American growth coincides with an increase in inflation in China at 5.6%
especially for the food (+ 15.4%). The central bank of China still will raise its rates. The conjunction of these two elements will cause a deceleration of the activity in the world whose crisis of the subprime is only one of the aspects, the emerged part of the iceberg.

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According to the last figures published by the Fed, M2-M1 (saving of the households) increases more quickly than its long tendency, which means that the households save more because they fear that their situation will worsen, which makes stagnate the activity in the United States,
Figure 1: http://s3.archive-host.com/membres/up/2107676425/20070813US1M2M1.gif

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The increase in M2-M1 year-on-year is high: around 8%,
Figure 2: http://s3.archive-host.com/membres/up/2107676425/20070813US2M2M1.gif

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The free money supply increases and the GDP growth slows down: it was 1.8% year-on-year in the second quarter, and it could be 1.7% in this third quarter, i.e. 0.7% compared to the previous quarter in annualized rate, assumption selected here,
Figure 3: http://s3.archive-host.com/membres/up/2107676425/20070813US3FRM.gif

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To consult the statistics of the GDP:

http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm

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