This article first appeared at The McAlvany Intelligence Advisor on Wednesday, May 20, 2015:
It’s no surprise, really. Most mainstream economists look at the world through Keynesian lenses, they attend the same conferences, read the same reports, are employed by companies in the same industry, hold degrees from the same universities, and are rewarded for having a view that doesn’t stray from the norm, even if that view is wrong. It’s a perfect reflection of the herd mentality: the impulse or tendency toward “clustering,” reflecting the need for conformity. It’s how economists make weathermen look good.
If their view turns out to be wrong, they adjust, slowly. If they are challenged or threatened, they defend their positions with pseudo-logic and sophisticated explanations. They keep their collective heads down and remain well-nourished for staying close to the mean.
In February, the Philadelphia Fed projected that the nation’s GDP would grow at an annual rate of 3 percent in the first quarter. Now that all the data are in, the economy actually went negative in that quarter. It projected that, for all of 2015, the economy would grow at a 3.2 percent rate. Given what is known now, that projection will likely proven wrong: 1.6 percent appears much more likely.
Two weeks ago, the 62 economists polled by the Wall Street Journal reflected their herd mentality: the economy will grow by 2.8 percent annualized in the second quarter and 3 percent for the full year. They defend their projections thusly: the first quarter was bad because of the weather, because of the west coast port shutdowns, because consumers are reluctant to spend their gasoline savings, and small business owners are too timid to expand. Not to worry: just like last year, there will be a rebound. Count on it.
Retail sales are flat, but spending in restaurants and bars is up. So just wait: retail sales will follow. Stuart Hoffman of PNC Financial Services summed it up for his peers: “The April spending numbers will look better once we get information on services. That’s where consumers are spending their money, and the April increase in restaurant sales points to greater demand for services overall.”
How, exactly, or why, remains a Keynesian mystery.
Michael Moran of Daiwa Capital Markets also hopes for the best: “Solid job growth and low energy prices could stir spending,” while Gregory Daco of Oxford Economics said that “the drag [of the strong dollar and lower energy prices] will be less in the second half.” Kiplinger’s David Payne used the same language of “could,” “will be,” “will look better” and “points to” offered by his peers:
The economy is sure to pick up steam in coming months, improving to 2.6 percent to 3 percent for the year as a whole … a slow start last year was followed by a strong rebound.
Continuing job gains and growth in consumer incomes will spur purchases of homes, cars, and other products and services. Lower gasoline prices are also putting more money into consumers’ pockets, helping to fuel consumer outlays in the months to come.
The housing market is also in for a solid year, propelled by job growth and income gains plus an increase in household formations and pent-up demand.
It’s almost as if each is looking over everyone else’s shoulder, but not seeing the obvious slowdown:
- Consumer confidence indexes are below any economist’s prediction
- The Empire State Manufacturing Index is coming in weaker than expected
- Industrial production nationwide has declined for five months in a row
- Retail sales numbers continue to disappoint, and
- Household spending growth expectations have plunged.
Is anyone seeing this? Surprisingly, the Atlanta Fed is. Whenever new data about the economy is reported, they issue their proprietary “nowcast” – GDPNow – based upon 13 leading economic indicators. Spokesman Patrick Higgins explains:
The GDPNow model forecasts GDP growth by aggregating 13 subcomponents … [its] forecasts are found to be more accurate than a number of statistical benchmarks since 2000.
In February GDPNow projected that the US economy was poised to slouch along at just 1.9 percent. Two weeks ago GDPNow projected growth at 1.2 percent. Last Wednesday it dropped its outlook further to just 0.7 percent.
This will prove most embarrassing to the herd if it’s right. And it just might be right. The average time between recessions is six years. The Great Recession ended, according to the National Bureau of Economic Research (NBER), in June, 2009. That was five years and eleven months ago. The herd just might be forced to change direction.
FRB Atlanta: GDPNow Latest forecast
FRB Atlanta: GDPNow: A Model for GDP “Nowcasting”
Wall Street Journal: Economists’ Forecast: Here We Grow Again
The New American: Do Negative Interest Rates Portend a Negative Economy?