Welcome to Japan: More on The Q1 GDP Report

John and I both took note of the disastrous first quarter GDP report yesterday.  Today it is worth bringing to your attention the observations of economist John Makin of the American Enterprise Institute, who is an unassuming and soft-spoken fellow (we were billeted in the same office suite) who has a very impressive track record of calling the shifts and directions in the economy.  His bottom line: forget about 3 percent economic growth.  Even more bracing: “That’s a ‘Japan-Lost-Decade’ style number.”  And his prediction: the Fed will continue with its easy-money policy longer than thought:

These are extraordinarily weak numbers, especially given two facts. Early this year confident predictions abounded of 3-4% growth in 2014. Right up to the initial release of the Q1 growth rate at 0.1% forecasters had been calling for 2-3% growth. Now, on the third try, the Commerce Department is telling us the the economy shrank during Q1 at a dismaying 2.9% pace.

The Fed has uttered not a word about the very weak GDP numbers and their implications for its rosy prediction of 3% growth. Nor has it said anything about possible changes in Fed policy aimed at sustaining growth. The Fed Chairman, Janet Yellen, chose instead to look ahead to a growth rebound based on stronger growth of consumption and investment. The Fed’s only policy option, if it can be called that, is to talk about further delaying the first rate increase in interest rates that it mandates. Markets have set that date at about mid-2015. No doubt it will slip further to early 2016 given the weakness of the US economy.

Meanwhile, the gimlet-eyed Megan McArdle thinks as I do that the current scene is very ominous for Democrats:

I’m not exactly ready to call recession yet — consumption was still basically healthy, and the weather was awfully bad. But I’ll be crossing my fingers until the next report comes out.

And so, presumably, will Democrats: partly because they are patriotic Americans who want to see their country do well, but also because recessions are bad for incumbents and, one imagines, particularly bad for the party that claimed the other guys had driven the economy into the ditch and that they were just the folks to drive it out. If the economy heads back into a recession this year, things start looking pretty grim for the Democrats — not just for this year, but for 2016.

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