Learning to live in a Donald Rumsfeld world (Part 3)
Some people say the definition of insanity is doing the same thing over and over again and each time expecting a different outcome. Assuming this definition is reasonable, one has to wonder if a deep vein of insanity runs through the economics profession. For the past few years, most beginning-of-year forecasts have been composed of the same basic message: this is the year when things will turn around. This is the year when U.S. economic growth will re-emerge in a significant way and produce huge numbers of new job opportunities. And each year very early economic data suggest economists may have finally beaten the odds and gotten the forecast right, only to find by spring that the economy remains under significant stress.
Sad to say, 2012 is falling into this same regrettable pattern. As the year began the typical forecast called for real GDP growth in the 3– to 4-percent range, with the expectation that some 2.5 to 3 million new jobs would be created.
Unfortunately, if the nation’s soothsayers had just organized their thoughts based upon Donald Rumsfeld’s known-knowns and known-unknowns they could probably have avoided the ignominious task of justifying their seemingly never-ending series of ridiculously optimistic forecasts.
As discussed over the past couple of weeks, the known-knowns are pretty much locked into place and don’t take a genius to recognize. Included among these are the Federal Reserve’s fixation with an easy money policy (and the resulting low interest rates), the lack of any new fiscal stimuli, and the slowdown in the economies of previously fast-growing nations (such as China). All of these point to a U.S. economy which seems destined to grow quite modestly
Two highly significant known-unknowns are the euro-zone crisis and the fiscal cliff that the U.S. faces as the year 2013 begins. If nothing else has been learned over the past few years, it is that people and businesses hate uncertainty, and these two influences are huge unknowns filled with uncertainty. And with uncertainty comes risk-avoidance and a tendency to engage in a more cautious approach to spending, which also holds down growth opportunities.
And mind you, all of the known-knowns and (at the very least) the existence of the known-unknowns were … in a word … known as the year began, with each and every one of them suggesting a very slowly expanding U.S. economy.
While other restraining factors could be cited, these few represent some of the major reasons mentioned in January’s Commerce National Bank Forecast to explain why we felt the 2012 outlook was being over-estimated once again. In the half-year since the document was prepared, little has occurred to change our basic outlook. Our GDP forecast on a quarter-by-quarter basis throughout the year was for very modest increases of 2.0 percent, 1.5 percent, 2.0 percent and 2.0 percent from the first through fourth quarters, respectively. As matters currently stand, that outlook has not changed. And as the year began the Forecast indicated that some 1.75–2.0 million payroll jobs would likely be created during the year. Despite a disappointing spring performance, that figure still looks reasonable.
As if to confirm the reasonableness of this outlook, figures over the past few weeks have been sending warning signals regarding the economy’s lack of strength. Weekly claims for unemployment insurance have been slowly creeping back up uncomfortably close to the 400,000 level. Consumer spending for the months of March, April, and May have been virtually unchanged, as the number of new employment opportunities and the level of consumer confidence both stagnated. And on nearly a worldwide basis (including the U.S.), the once vibrant manufacturing sector is exhibiting a drop in activity as the year’s first half concludes.
It should be noted that a few factors do seem to be doing significantly better than what the Commerce Bank Forecast suggested back in January. The nation’s housing sector is coming back more energetically than originally thought in terms of new starts. While it is still in a deep hole compared to the peak-year performance, the number of housing starts suggests this sector will be a net contributor to 2012 growth and help offset weaknesses elsewhere. And while national employment growth is still on track with our original outlook, Ohio and the Columbus MSA payroll growth is much more vibrant than anticipated.
In summary, 2012 is posting good economic news for both Ohio and Columbus compared to the January outlook, but at the national level, it’s just the same-old, same-old.
Dr. James Newton serves as Chief Economic Advisor to Commerce National Bank and is an auxiliary faculty member in economics and statistics at OSU-Marion and OSU-Newark. Dr. Newton’s views do not necessarily reflect those of Commerce National Bank or OSU-Marion/Newark.