The US Federal Reserve concludes their April policy meeting in the early hours of tomorrow morning. Unfortunately it’s not the full shebang on this occasion – there’ll no economic projections released or press conference from Chair Janet Yellen – so all attention will be on the one-page monetary policy statement that will accompany the rate decision.
After a run of soft economic data the widely held view among most market participants is that it will strike a more dovish tone that was previously seen in March – particularly should Q1 GDP released before the conclusion of the meeting undershoot already-pessimistic expectations.
While some believe the (likely) softness of the data will see the Fed strike a more cautious tone than what was expressed previously, Deutsche Bank’s Chief US Economist Joseph LaVorgna believes that gross domestic income, rather than GDP, offers a better indicator on underlying economic strength continued improvements in the labour market.
Here’s a chart supplied to support the view followed by his explanation:
“In Q1 2014, GDI declined -0.7% compared to a -2.1% drop in GDP. In Q2, GDI rose 4.1% versus 4.6%; in Q3, GDI was up 5.2% compared to 5.0% for GDP and then in Q4, GDI increased 3.2%, one full percentage point faster than GDP. Over the full year, GDI rose on average 50 basis points more than GDP. In our view, the GDI data are a better proxy of underlying economic activity than the GDP figures because the former are derived from withheld income tax receipts, which do not get revised. To be sure, the stronger 2014 GDI numbers are, on the surface, more consistent with the underlying trend in the labor market, which generated 3.1 million jobs last year. If we are to believe the expenditures figures, this would mean that productivity growth was unusually weak. It seems unlikely that companies would hire so many unproductive workers.”
Lavorgna believes that the FOMC will look through the GDP number, something he suggests “will be evident in the FOMC statement”.
Should he be correct it will have ramifications for markets, particularly in foreign exchange, given many are positioned for a dovish outcome tomorrow.