The new GDP figures offer a reminder that one can’t analyze movements in GDPby looking at components of GDP. We saw huge increases in spending on cars (pushing consumer durables up by 15.3%) and houses (up 19.1%.) And yet overall RGDP growth fell to only 2.2%. Why didn’t the spending on cars and houses help? Because in the short run it’s NGDP growth that drives RGDP. And the Fed continued its tight money policy by allowing only 3.8% NGDP growth, same as the previous quarter.
If the Fed had a strict NGDP target and everyone knew what it was the Scott would be correct. However, if either the Fed doesn’t have a strict target or we don’t know what it is then Cars and Houses are causal or informative, respectively.
This is because Cars and Houses pull harder on NGDP more than most sectors of the economy. If we think of the Fed trying to influence NGDP indirectly – through the interest rate or some other mechanism – then this would imply that an exogenous negative shock to the purchase of cars and houses would tend to lower the demand side pressure on NGDP and so the Fed would need to loosen its indirect target to keep NGDP growth constant. Conversely and exogenous positive shock would raise demand side pressure on NGDP and the Fed would need to tighten its indirect target to keep NGDP growth constant.
Even if the Fed is targeting NGDP directly then we could still look to Cars and Houses to inform us about what they were doing. If in the absence of some non-Fed shock the construction of new homes begins to decline, then one can say “Ah this must mean the Fed is tightening NGDP”