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The Public Policy
Pessimism Revised
Latest Federal Reserve predictions suggest a bleaker next two years than anticipated.
On November 23, the Federal Reserve’s Open Market Committee released the minutes from its November 2-3 meeting.
Before getting into the important data regarding the FOMC members’ updated forecasts for future economic activity, it should be pointed out that the FOMC staff also have an economic forecast. While the specifics of the staff forecast are not in the minutes, they do mention that “the staff revised up its forecast for economic activity in 2011 and 2012.” But note the caveats to this optimism: “the November forecast was conditioned on lower long-term interest rates, higher stock prices, and a lower foreign exchange value of the dollar than was the staff’s previous forecast.”
Perhaps just to tell the FOMC staff what the markets think of their assumptions, Tuesday gave us much lower stock prices and a much higher foreign exchange value of the dollar, with the USD settling at a 2-month high versus the Euro, with that currency-in-turmoil worth less than $1.34.
Turning to the people whose votes count, the Federal Reserve Board Governors gave new projections on GDP growth, unemployment, and inflation, with their last predictions having been made for the June FOMC meeting.
The results are dramatic in the normally boring world of the Fed: All of the participants’ projections for GDP growth for 2010 (which we obviously have almost all the data for already) were between 2.3% and 2.5%, whereas in June, the predictions ranged from 2.9% to 3.8%.
Looking to the future rather than the past, the “central tendency” of GDP projections for 2011 (which removes the three lowest and three highest predictions) fell from a range of 3.5%-4.2% to a range of 3.0%-3.6%, a drop of about ½% of GDP. With GDP around $15 trillion, we’re talking about $75 billion less in economic activity, or about $250 for every man, woman, and child in the United States. This is a huge change for just one year from now. Furthermore, since GDP growth is then compounded, this basically means we’ll be much poorer every year for the foreseeable future than FOMC participants had expected.
Though the central tendency for 2012 was little changed, the range of guesses fell from 2.8%-5.0% to 2.6%-4.7%.
More importantly, in terms of politics, was the stunning jump in FOMC members’ predictions of future unemployment: Again, we know this year’s data, so the key aspect of the new 9.5%-9.7% range is that it shows the FOMC having been too optimistic in the past, with the June prediction being 9.2%-9.5%.
But the real story is in the updated forecasts for 2011 and 2012. The new central tendency for 2011 is 8.9%-9.1% versus a June prediction of 8.3% to 8.7%. Using the midpoint of the ranges, the new forecast is a full ½% higher than just 5 months earlier. The 2012 numbers are even worse, with a new range of 7.7% to 8.2%, up from 7.1% to 7.5%, an increase of 0.65% from midpoint to midpoint.
The first factor listed in the minutes as to why participants thought growth would be slower than previously expected was “a high degree of caution exhibited by consumers and businesses.” And why wouldn’t we be cautious with a government that has gone from wanting to control or destroy private industries from cars to health insurance to banking, to looking utterly incompetent, confused, and ineffective in everything from tax policy to negotiating free trade agreements? There’s no way to know what the next shoe will be to drop and therefore little incentive to take entrepreneurial risk.
The minutes also show disagreement about the value and risks of “QE2,” the Fed’s aggressive Treasury Security purchasing program. Some members thought that the program would help the economy by keeping long-term interest rates low and perhaps by preventing disinflation or deflation. “Some participants, however, anticipated that additional purchases of longer-term securities would have only a limited effect on the pace of the recovery; they judged that the economy’s slow growth largely reflected the effects of factors that were not likely to respond to additional monetary policy stimulus…” They also noted risks of debasing the value of the dollar and causing “an undesirably large increase in inflation.”
In other words, the Federal Reserve, which is supposed to be a stabilizing buffer against the chaos of the fiscal policies of the elected branches of government, is in the view of even some of its own Governors potentially adding to rather than dampening our current economic turmoil.
The FOMC’s new projections, if accurate, could spell disaster for Democrats in 2012. As James Carville famously quipped, “it’s the economy, stupid.” Indeed it is.
While the Fed’s new forecasts might gladden the heart of someone who would love to see Barack Obama be a one-term president, we must not forget the huge cost to our nation of millions of people kept unemployed by the ultra-Keynesian policies being implemented by the current administration and Obama’s willing accomplice, “Helicopter Ben” Bernanke. These policies are all the more reprehensible because Bernanke is an economic historian and the lessons of history are replete with the consistent and utter failure of Keynesian economics.
To the extent that Democrats in Congress believe, as President Obama and Nancy Pelosi have both suggested, that their 2010 electoral drubbing was due to simply not explaining their actions well enough, their echo chamber will cause them to ignore the screaming, pleading voices of an American citizenry desperate for economic stability. We should all hope that the Fed’s new projections are overly pessimistic; but should they be accurate (or not pessimistic enough) we should all endeavor to ensure that those responsible for economic failure pay a political price when the votes are counted two years from now.
About the Author
Ross Kaminsky is a self-employed trader and investor and is a senior fellow of the Heartland Institute. He is the host of The Ross Kaminsky Show on Denver’s NewsRadio 850 KOA at 11 AM on most Sundays. You can reach Ross by e-mail at rossputin(at)rossputin(dot)com.
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Bill Hussein O'Stalin| 12.6.10 @ 6:18AM
Any organization run by plugged in government or quasi-government employees has no reason to be accurate. Their jobs and reputations are not on the line so any predictions are suspect.
The real problems with employment go much deeper then Keynesian policies. All three major pieces of legislation signed by Obama contain a litany of gender and racial preferences. These are the real job killers and explain why 8 million jobs have disappeared over the last two years.
Many of these job opportunities were management and supervisory positions shipped overseas. The jobs are simply redesigned or eliminated.
As far as the Keynesian spending bout, it's run it's course. The Congress won't be forking over any more money for union payoffs or to bail out any more financial institutions who are sitting on several trillion dollars of taxpayer funds.
Obama was the trigger who has unleashed a perfect storm of malevolent forces into the U.S. economy. Unemployment will eclipse 10% by the spring of 2011.
The political class in D.C. will continue to kick the can down the road with more phony fiscal commissions and talk of bipartisanship. It's a long road and there are many feet left to kick many more cans.
Alan Brooks| 12.6.10 @ 11:42PM
Another six years to recovery.
PLEASE, more Reagans and Ikes; less Bushes and Nixons.
Sam Vaughn| 12.6.10 @ 8:34AM
It's time we all realize as many have suggested; that when you connect the dots of reality they form a picture of an administration bent on the destruction of the American economic engine, and creating a world of despair for which they think they will conveniently provide all the answers... Too bad this pesky internet thingy is still operating.....I'm beginning to think Assange is a patriot.....
Alan Brooks| 12.6.10 @ 11:44PM
"I'm beginning to think Assange is a patriot..."
Ellsberg was a patriot, too. Plus the NYT. However, you wont admit it, ever- too prideful
Louis Jenkins| 12.6.10 @ 8:35AM
Temporary tax relief? A continued devaluation of the dollar? That's two of the problems that the government has made. If it is temporary that means jobs will not be created. Small businesses know that Big GovCo. can change to more taxes at any given moment, and the increased cost of doing business only increases. Unemployment will get worse. And yes, things are not going to get any better. Have we had enough America?
Stan Redmond| 12.6.10 @ 9:27AM
The projections seem quite rosey to me. Thankfully I have such a niche market I am not effected by a crummy economy. BUT!!! I and my employees are VERY effected by tax rates and this gargantuan turd on my shoulders called Obamacare. I won't expand my business AT ALL and if someone quites I won't replace them. I'm going to have to replace a productive employee with a full time staffer just to fill out all the stupid 1099s required by the dear leader's bill we had to pass to know what's in it...
ncatty| 12.6.10 @ 9:32AM
I will trade a quickly improving economy for Obama's re-election in 2012. However, it appears more likely that the economy will stagnate and Obama will lose.
Al Adab| 12.6.10 @ 10:38AM
The Left, and this administration, prefer that this economic condition be the new norm. After all, if one recalls the campaign we were told Americans have too much and need to do with less. Therein lies the problem of central planning. Someone else, a bureaucrat, decides what you need, deserve and get.
Louis Jenkins| 12.6.10 @ 2:16PM
http://www.federaltimes.com/ar.....60301/1001
See how many federal employees really have their wages frozen. Follow the link.
Sonny| 12.6.10 @ 8:45PM
Obama is Jimmy Carter 2.0 redux , on Steriods..!!!!
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Personally I am so sick to death with, and of, Obama / Jimmy Carter 2.0 Redux, which one should never have to live through twice in one lifetime, I can't wait til 2012..!!!!
Who will be the next Ronald Reagan, the next President of the Unoite States of America.. my prediction will be, Gov. Sarah Palin.. then President Elect Sarah Palin, and why do I say this, because it is 1 and half year away from the final and official Republican Nomination and Nominee, and by that time, the US Economy will be so bad, and the country will be in such Carter-esque dire straights with double digit unemployment, Inflaltion, deflation, stagnation, because of Obama, and his Policies and Agenda, the US Dollar will be almost worthless by then, that Gov. Sarah Palin will be the only clear choice, a true Ronald Reagan Constitutional Conservative Republican, that will be the only one who will be the complete opposite of Obama, the Anti-Obama, that can, and will have the fortitude, will, and resolve, to completely reverse everything Obama has done to destroy America, and restore America's Economic, Political, and Social Prosperity, and clean up all the Washington DC Govt. Bureaucratic Corruption, from both sides of the aisle..!!!
Sonny| 12.6.10 @ 8:46PM
Obama is Jimmy Carter 2.0 redux , on Steriods..!!!!
-
Personally I am so sick to death with, and of, Obama / Jimmy Carter 2.0 Redux, which one should never have to live through twice in one lifetime, I can't wait til 2012..!!!!
Who will be the next Ronald Reagan, the next President of the United States of America.. my prediction will be, Gov. Sarah Palin.. then President Elect Sarah Palin, and why do I say this, because it is 1 and half year away from the final and official Republican Nomination and Nominee, and by that time, the US Economy will be so bad, and the country will be in such Carter-esque dire straights with double digit unemployment, Inflaltion, deflation, stagnation, because of Obama, and his Policies and Agenda, the US Dollar will be almost worthless by then, that Gov. Sarah Palin will be the only clear choice, a true Ronald Reagan Constitutional Conservative Republican, that will be the only one who will be the complete opposite of Obama, the Anti-Obama, that can, and will have the fortitude, will, and resolve, to completely reverse everything Obama has done to destroy America, and restore America's Economic, Political, and Social Prosperity, and clean up all the Washington DC Govt. Bureaucratic Corruption, from both sides of the aisle..!!!
Randy131| 12.7.10 @ 1:37PM
What is so surprising about this report. Most people already knew that the rosy pronostications about the economy by Obama and the Democrats were lies. This just shows that the FRB was collaborating with them before the elections to keep their losses to a minimum, but since the elctions are over and the damage is done, now we get the truth. Obama and his cohort Bernanke will destroy the US Economy, with the help of the Democrats and all their socialistic and communistic brethern. I just wonder what will be left when the true American conservatives take over and restore the Founding Fathers' visions?
Randy131| 12.7.10 @ 1:39PM
Prognostications