Slowdown is likely behind US as GDP appears to have accelerated in Q2 - BBH

Economists at BBH explain that the US economy slowed from 3.5% in Q316 to 2.1% in Q4 and then 1.2% in Q1 17, however, the slowdown is likely behind the US as GDP appears to have accelerated in Q2.  

Key highlights:

"After being widely criticized for being too dovish, the Federal Reserve has become subject to widespread criticism that is was too hawkish last week in announcing a rate hike and details of its unwinding of QE.  Some argue the economy is slowing, but this assessment is made by looking at the rear-view mirror.  The Fed does not target GDP.  Its mandate is full employment, and that has been approached.  It has a mandate for price stability.  Inflation has softened in recent month, but Yellen and the Fed's leadership wants to look through it as it has been primarily driven by the fall in energy prices and wireless communication.  There are some other quirky things, dragging down core inflation, like owner equivalent rent (falling while rents are rising).  The prices received from the Philly, and NY Fed surveys reached new five-year highs." 

"Underneath Yellen and Dudley's recent comments is a faith in the Phillip's curve, which essentially asserts that businesses will raises prices to offset rising labor costs.  This is a debatable point.  Is labor really simply another input, like raw materials?  Some argue that wages did not fall as much as the economic conditions would have suggested during the crisis given the slack and deflationary conditions.  Others argue that wages should be rising faster now, even though they are growing faster than productivity.  In any event, as long as the labor market is absorbing its slack, at least some Fed officials will be confident that price pressures will rise even if there are unpredictable lag times."  

"At the same time,  some Fed officials, like Chicago's Evans, have expressed concern about "technological deflation."  It appears, for example, that Amazon can deliver food items at around 20% lower than one can buy them in the store from Whole Foods.  Uber, now Lyft, can undercut traditional taxi cabs and black cars.  The idea is that new technology is disruptive, enhances competition and drives prices lower." 

"On the other hand, the kinds of goods that are covered do not seem to be large weights in CPI or core PCE basket.  And the enhanced competition might be a short transition phase.  Consider that Google accounts for nearly 90% of search advertising.  Facebook accounts for almost 80% of mobile social media traffic. Roughly three-quarters of e-books are sold by Amazon."