Weaker economy and monetary policy

The US Commerce Department reported that first quarter GDP grew at a 3.1 percent annual rate, down from 3.8 percent in the fourth quarter and the slowest in two years. Analysis and reactions from economists can be found at the macroblog. Barry Ritholtz also posted some reactions from economists reported at WSJ.com, as well as his own.

My own short take: It's not too bad a number, provided you ignore the rising prices and slowing business investment. Not that I recommend anyone ignore the latter.

Earlier yesterday, there had been some mixed news out of Asia.

In Japan, the Ministry of Economy, Trade and Industry (METI) reported yesterday that industrial production unexpectedly fell 0.3 percent on a seasonally-adjusted basis in March from the previous month, bringing the quarterly rise for January-March to 1.7 percent. However, the manufacturers surveyed by the METI forecast a strong rebound of 3.5 percent in April. And earlier, the NTC Research/Nomura/JMMA Purchasing Managers Index (PMI) was reported to have risen to a seasonally-adjusted 53.3, its highest reading in seven months and up from 52.7 in March.

A separate METI report showed that retail sales rose 0.6 percent in March from a year earlier, although it was down 0.9 percent on a seasonally-adjusted basis compared to February.

Not surprisingly, the Bank of Japan decided to leave its monetary policy unchanged yesterday.

South Korea saw some economic improvement, with the National Statistics Office (NSO) reporting yesterday that South Korean industrial output in March rose 4.8 percent year-on-year to give a 3.8 percent increase for the first quarter. Industrial output in March rose 3.8 percent month-on-month on a seasonally-adjusted basis, reversing the 4.6 percent fall in the previous month. In addition, the March index of leading indicators was up 1.6 percent from a year earlier compared with a gain of 1.4 percent in February.

Today, Singapore's unemployment rate was reported by the Ministry of Manpower to have gone up by 0.2 percent to hit 3.9 percent in the first quarter of this year. This figure takes added significance in the light of an International Monetary Fund report released yesterday that warned the Monetary Authority of Singapore that it might have to review its tightening policy.

Singapore may have to cap its currency's rise to support an economic expansion this year amid weaker overseas demand for its exports, the International Monetary Fund said. "Monetary policy might need to become more supportive" if overseas demand weakens more, the Washington-based lender said in a report released yesterday. It predicted Singapore's economy will grow by 4 per cent this year, less than half the pace in 2004.

The IMF's concern is understandable. Tightening in the face of not just a slowing economy but a contracting economy is not quite the conventional way of running monetary policy.

In contrast, the Federal Reserve has been inclined towards a more accomodative policy, a policy which has led to asset bubbles and a record current-account deficit, at least as charged by Stephen Roach of Morgan Stanley. It is a charge, however, that David Altig has been trying in recent days to defend against (see this, this, this and this). And in his latest post, he highlights the fact that the Fed itself had not always been unanimous.

Personally, I tend to think that the Fed has indeed overstimulated. It is an unfortunate but understandable mistake. Like the unemployment rate, the calculation of neutral interest rates has been thrown out of kilter by the entry of 2 billion poor people into the global economy.