Up With Price Pressures

Why being fundamentally bullish on bonds now is delusional. Plus, looking for an honest day's work.
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I Believe (Reprise)


Gross domestic product

(or GDP) rose at a 4.5% annual rate during the first quarter. The table below shows GDP increases, alongside which sectors of the economy added to (a) or subtracted from (s) growth, for both the past two quarters and the past two years.

Consumption rose at a 6.7% annual rate during the first quarter, for example (this number is not shown in the table), and, because it accounts for roughly 69% of GDP, it contributed more than 4.6 percentage points to the first-quarter growth rate. Also, recall the familiar equation that GDP = C + I + G + X and, looking at the first-quarter numbers, note that 4.5 equals (roughly) 4.68 plus 1.47 plus 0.75 minus 2.41. Finally, note that investment comes in four forms: business investment (computers and peripherals and information processing and such), residential buildings, commercial buildings and inventories. Again looking at the first-quarter numbers, note that 1.47 equals (roughly) 0.87 plus 0.67 minus 0.01 minus 0.07.

Two notes (and all apologies if this sounds familiar):

Something called final sales to domestic purchasers (or FSDP) is arguably the most important line in any GDP report. FSDP equal personal consumption expenditure plus investment plus government spending (you can find this beast in Table 1 of the GDP release). In plain English, FSDP represent the broadest available measure of final domestic demand.

On a real (inflation-adjusted) basis FSDP rose 5.1% last year, but they were rising at a 5.7% year-on-year rate as the second quarter began. On a nominal basis FSDP rose 5.7% last year, but they were rising at a 6.5% year-on-year rate as the second quarter began. In other words, when the second quarter began 29 days ago, the pace of domestic demand -- on both a real and a nominal basis -- was still accelerating. It wasn't leveling off, and it certainly wasn't decelerating. It was accelerating; it was increasing at an increasing rate.

Kindly relate this fact to each and every slowdown moron you bump into.

Something called the chain-type price index for gross domestic purchases (or PIGDPU) measures the prices of everything (including imports) Americans buy. It is the broadest available measure of the prices paid by U.S. residents (you can find this beast in the Addenda section of Table 4 of the GDP release).

This inflation measure put in a bottom over a year ago, when it fell 0.2% during the first quarter of 1998. It then went on to rise 0.4% during the second quarter, 0.7% during the third quarter, and 0.9% during the fourth quarter. It rose 1% during the first quarter of this year.

Meantime, the latest five quarterly increases (ending with the first quarter) in the PIGDPU less food and energy clock in at 0.7%, 0.7%, 0.7%, 1.1% and 1.1%, and the latest five increases in the PIGDPU less computers clock in at 0.4%, 1.0%, 1.3%, 1.4% and 1.5%. (You can find those animals in Appendix Table A in the GDP release.)

And yes: Those numbers are just plain little, and the pace of their acceleration is unambiguously modest.

But listen up.

Big growth is putting upward pressure on the price measures now that help from a host of temporary supply shocks is dissipating. And the economy does not "slow down" all on its own. Ever. It's never happened before, and it ain't gonna happen that way now.

So, for as long as the supply shocks that produced particularly kind inflation numbers over the past few years continue to unwind, upward pressure on the price measures will persist.

That may not mean a higher

fed funds

rate anytime soon, but you're delusional to be fundamentally bullish on bonds against a backdrop like that.

Side Dish

I do one day hope to have a

real job. Something especially noble. Something like ... ohh ... helping insanely rich people get even richer.

Best Star Wars character?


Boba Fett.


The lovely Princess Leia.

Star Wars is for dorks. It sucks.