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.

Posted by Jim Newton on Jul 5 2012. You can follow any responses to this entry through the RSS Feed. Comments can be made below.