The trend of nondruable goods spending is tracking the pre-recession trend. So, at this point, we are seeing overall consumption supported by a rebound in durable goods spending that offsets a deterioration in the path of spending on services. The bounce in durable goods spending will come to an end at some point, as 16 million units is likely an upper bound for auto sales. Will service spending accelerate to compensate? Or will we see a new normal, with a constrained consumer spending at a path and rate below those prior to the recession? I am sympathetic to that outcome, with a corresponding increase in export growth to foster rebalancing of the economy (of course dependent upon growth in the rest of the world, something in question at this point).
But that still is not a story that rapidly returns the economy to potential output. Which brings me back to a familiar place – putting aside the threats to the economy, it is easy to see a positive growth path for the economy, but more difficult to see a rapid closure of the output gap.
These are the trends but I don’t know exactly what to make of them. For one, looking at PCE services is a nightmare because so much is housing, finance and medical care. Most of which consumers do not pay for directly and none of which is chosen on a month-by-month basis.
The larger issue though has to do with why we think the economy is depressed. If you think that practically speaking the nominal interest rate is too high then is hard to see a world where autos come back to 16 million units, construction comes back to 1 million units and the economy, the Fed is accommodative and the economy is not booming.
Under both of those conditions the natural interest rate will rise strongly. Fed policy that is now mildly contractionary will become heavily expansionary. This is without any need for more QE.
Projecting these trends out into the future without a narrative about how they interact doesn’t make a lot of sense to me.
Now, yes the Fed could tighten in the face of rising prices and keep the gap going. However, if it doesn’t tighten and if contagion from Europe doesn’t kill us then it looks like the natural rate is set to rise which in turn means it looks like general Fed policy is set to turn accommodative.