A Closer Look at Nominal Growth

The pace of personal consumption expenditure keeps on accelerating.
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Curiouser and Curiouser

JACKSON HOLE, Wyo. -- "Hey, moron! Why not look at


growth for a change?! The economy continues to soften in nominal terms. How convenient that strong-growth idiots like you fail to mention it!"

Thus the charge leveled against the folks who (now?) live outside the asylum by those still trapped in it.

See what the loonies are getting at? One produces a real (inflation-adjusted) variable by dividing its nominal counterpart by some measure of the price level (a deflator). So sure, the madman will concede, in


terms, the economy still


to be strong. But what's


happening, he argues, is that ever-lower price levels are keeping the outside world from noticing that nominal growth is slowing to a worrying degree.

Economics Illustrated

Call the real variable R and set it to 5. Call the nominal variable N and set it to 100. Call the price level P and set it to 20.

So, R = N / P = 100 / 20 = 5.

Then assume the price level halves so that P = 10. The relevant equation for the madman now becomes:

R = N / P = 50 / 10 = 5.

Why? Because R must remain fixed -- it is inconceivable to him that real activity actually increased -- and so working backward from the conclusion that the economy isn't as strong as it seems is the only way to get the math to work.

Problem is, that damn real world gets in the way. Take consumption -- the one and only make-or-break sector of the economy. The thing that accounts for roughly 68.5% of

gross domestic product no matter which way one measures it.

The pace of

personal consumption expenditure

has been accelerating for (generally) three straight years. Further, nominal PCE was rising at a 5.1% year-on-year rate when 1998 began, and, come Friday, we will learn that it was rising at about a 6.3% year-on-year rate when it ended.

Softening?! The fourth-quarter increase will go down as the biggest since a 7.5% surge during the final quarter of 1992. The $%@! thing hasn't even begun to


yet!! It was still


as 1999 began.

Play of the day? Long straitjackets.

Side Dish

Check out this

offering from


and the Economy in Perspective section of this

Cleveland Fed


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