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On Friday, all eyes will be on the second quarter GDP report which will include annual revisions to GDP growth for past years.Bank of America economist Michelle Meyer writes that this has been a “recovery of downward revisions” with each annual revision to payrolls and GDP since the 2009 recovery showing a “sharper contraction and weaker recovery”.
Meyer expects 2009 and 2010 growth to be revised lower, while 2011 growth could be revised higher given the positive revision to nonfarm payrolls and the drop in unemployment rate.
“That said, the level of GDP would likely still be lower, implying an even larger output gap, and, hence more slack in the economy,” writes Meyer.
Basically the severity and duration of the recession was understated, while recovery was overstated, according to Meyer, suggesting that monetary policy wasn’t adequate over the past few years.
Remember, the revisions had a significant impact on monetary policy last year. After a downward revision in real GDP to show 0.2 per cent decline from Q4 2009 to Q1 2010, the Fed pushed its forward guidance for rate hikes until 2013.
Given all that, Bank of America maintains its view that the Fed will extend its rate guidance in the next meeting from late 2014, to mid-2015.
Photo: Bank of America Merrill Lynch
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