Must-know: Why has economic growth been subdued for 5 years?
Dr. William Dudley mentioned in his speech that the trajectory of economic growth continues to disappoint. GDP growth has averaged just 2.2% since June 2009, when the downturn ended—much lower than long-term growth rate of over 3%. The 2014 first quarter GDP growth came in at a dismal 0.1%, partially affected by severe weather conditions. Dudley feels that the other factors include the expiration of the extended unemployment compensation benefits and bonus depreciation at the end of the year. Severe weather conditions affected almost all sectors of the economy, including retail (XRT), automobile, and capital goods. Companies like Wal-Mart (WMT) and Home Depot (HD) reported weaker-than-expected results during the first quarter, citing bad weather conditions.
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The Fed has kept the Fed funds rate near zero since June 2009 to boost consumption, housing demand, and capital investments. As the Fed couldn’t reduce the Fed funds rate any further, it also started buying Treasury bonds and mortgage-backed securities to provide additional liquidity to the markets. Despite these efforts, growth has remained subdued over the past five years. The Fed hinted at curtailing the bond buying program in its meeting held in June 2013. The hint wrought havoc on the bond market (BND), notably Treasury bonds (TLT), as yields rose sharply in anticipation of tighter monetary policy. Bond prices fell, as yields and bond prices share an inverse relationship.
Dudley attributed the subdued recovery to three factors: headwinds from the housing bubble bursting, restrained fiscal policy, and the global environment—notably the European crisis.
To find out why Dudley feels that two of these three factors have abated, and to see his outlook for the U.S. economy, read on to the next part of this series.