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September 30, 2012

At the end of 2010 and early in 2011, economists couldn’t say enough about the favorable growth path that the U.S. economy seemed to be entering. A fairly typical forecast published in January 2011 stated, “(e)conomists surveyed by the The Wall Street Journal are increasingly optimistic about the pace of the recovery, predicting the U.S. will grow at better than a 3.2% annual rate in each quarter of this year.”

Then came the first quarter’s actual growth rate of just 1.9 percent, and economists became a little less effervescent. Not to worry, most suggested, since the number of initial claimants for unemployment insurance was tracking below the 400,000 level, suggesting labor markets were strengthening and that anticipated more than 3 percent growth was just around the next statistical corner.

But then came a reversal in initial claims, with the magic number of 400,000 breached on an on-going basis. What’s more, May saw shocking employment/unemployment reports, with the number of jobs created decelerating to just 54,000 and the unemployment rate rising to 9.1 percent.

So what does the mood among economists look/feel like at this point? According to the June 2011 consensus among economists, “(t)he potential for a persistent slowdown in hiring is the biggest threat to the U.S. economy… as they sharply cut the number of jobs they projected the economy would create in coming months.”

So, have things really changed so much in the past six months? Or is it just possible that economists have demonstrated once again why many businesspeople have such a low opinion of economists, their forecasts and the wisdom of planning based upon what economists divine from their (some cloudy) crystal balls?

In this case, it would seem as though the contempt businesspeople have for the profession is well deserved. For example, just a couple of days before the May jobs report was released, the consensus figure for employment growth was in the range of 180,000 to 200,000 new jobs. Then two days before the data were published, the ADP employment figures were released and showed a very subdued advance. One day before the big number, the weekly initial claims figure came out and once again came in well above 400,000.

So, what did economists do as these figures were released? They ratcheted down their projections to an average of about 120,000 to 140,000. Even then they were still wildly optimistic.

Why do I mention this? Because, sadly, businesspeople are not able to change their hiring, inventory, capital expenditure and general business plans as quickly as economists change their (last minute) forecasts.

Needless to say, I smugly bring up these matters since the Commerce National Bank Forecast in January 2011 disagreed with the consensus forecast. So as others confidently predicted solid economic growth, the CNB Forecast stated, “(w)hen the lack of stimulus from FS2.0 (the second fiscal stimulus in December 2010) is combined with the retrenchment from all levels of government, 2011 is likely to be yet another year of very modest economic growth and little improvement in driving down the nation’s very high unemployment rate.” As such, the forecast indicated real GDP would likely finish 2011 just 2.4 percent higher than in 2010.

Even now, this analysis seems about right. All-in-all, the various segments of the economy have performed much as anticipated, with consumer spending growing very modestly; businesses spending more on equipment and software and less on structures; and government cutting back at virtually all levels given budgetary pressures. The only surprises were the rapid reduction in the unemployment rate (which is now back on the rise) and the drop of intermediate-term interest rates from the re-emergence of the EU sovereign debt crisis.

So, what does all of this suggest about the likely economic outlook for the remainder of 2011? Pretty much the same thing we said back in January. The probability of a double-dip recession seems quite remote (less than 1-in-10) unless some outside factor — such as a significant disruption in oil markets — throws the world’s economy badly off track.

While all of this may sound somewhat depressing, I would argue that it is precisely what the country needs. The de-leveraging phenomenon from past excesses continues, which is certainly a good thing. The intrusion of government in the economy is moderating, which is even better still. In short, the U.S. is witnessing the re-emergence of a modest, private sector-led recovery/expansion which will hopefully strengthen over time. While this outlook may not be glamorous, it seems to be precisely what the nation needs despite the present wailings and lamentations of some in the economics profession.

Dr. James Newton serves as chief economic advisor to Commerce National Bank and is an auxiliary faculty member in economics/statistics at Ohio State University-Marion.