How Many Revised Economic Forecasts Before The Fed Says The "R" Word?

Posted by Daniel DiRito, The All Spin Zone at 10:39 AM on February 21, 2008.

Economic forecasting isn't an exacting science...yet the American public often knows we're in a recession well before the experts. Politicians, on the other hand, love to hand out meaningless refund checks every time they hear rumblings of the "R" word. Americans should reject this stimulus package and demand sound & sustainable economic policy.

Just how many revised economic forecasts does it take to finally conclude that the U.S. is in a recession? Former Fed Chairman Alan Greenspan likes to up his odds we're heading into a recession by approximately 20 percentage points every quarter. Current Fed Chairman Ben Bernanke seems to prefer a different approach. His modus operandi is to lower GDP a few tenths of a percent with each revised outlook.

As an outside observer, this measured slide towards using the "R" word feels like being in my car at a red stoplight with my favorite backseat driver seated beside me. As we wait for the lights to change (because we know they will), my trusted traffic manager sits there predicting the seconds until the opposing green light will turn yellow...never getting it quite right...but jubilant each time he announces...after the fact...that "The light just turned yellow". This process continues until our red light turns green and we can proceed to the next intersection...to start all over again.

While I realize my analogy isn't an actual equivalent, the frustrations are much the same. Yes, predicting the twists and turns of the economy isn't an exact science...but I do find our willingness to grant these prognosticators a free pass each time they err to be a rather absurd practice. The fact that the nation holds its breath each time a new report is scheduled for release merely supports my contention.

WASHINGTON (AP) -- The Federal Reserve on Wednesday lowered its projection for economic growth this year, citing damage from the double blows of a housing slump and credit crunch. It said it also expects higher unemployment and inflation.

Under its new economic forecast, the Fed said that it now believes the gross domestic product will grow between 1.3 percent and 2 percent this year. That's lower than a previous Fed forecast for growth, which at that time was estimated to be between 1.8 percent and 2.5 percent.

With economic growth slowing, the Fed projected that the national jobless rate will rise to between 5.2 percent to 5.3 percent this year. That is higher than the central bank's old forecast for the rate to climb to as high as 4.9 percent. Last year, the unemployment rate averaged 4.6 percent.

And, with energy prices marching upward, the Fed also raised its projection for inflation. The Fed now expects inflation to be between 2.1 percent and 2.4 percent this year. That's higher than its old forecast for inflation, which was estimated to come in at around 1.8 percent to 2.1 percent.

The Fed said its revised forecasts reflected a number of factors including "a further intensification of the housing market correction, tighter credit conditions .... ongoing turmoil in financial markets and higher oil prices."

In truth, I suspect that the average American has just as good a sense of where the economy is headed as those who get paid to inform us. If the last number in our checkbook is negative, we conclude we have a problem. Why wouldn't the same math hold true for our national economy?

No, we allow our political leaders to sell us on the notion that a tax rebate of $300.00 to $1,200.00 is all that matters and all that is needed to jump start the economy...even as they continue to predict further economic contraction. Excuse me, but isn't that on par with each of us taking a cash advance on an already debt heavy credit card and thinking we're suddenly in the black?

Look, I understand the notion of spending an economy out of a downturn. However, the rest of that equation posits that the increased spending will result in new jobs, greater investment and productivity, and increasing revenues for the individual, the corporation, and the government.

Unfortunately, this equation may no longer be valid...especially since the jobs are often created in other nations, the investments are frequently targeted for countries with cheap labor such that productivity is less relevant, and the only increased revenues find their way into the pockets of formerly impoverished third world individuals and the corporations and their CEO's that benefit from the enhanced bottom line that ensues.

So what does the average American get? A stimulus package that provides a single check that won't overcome the unfavorable wage-inflation ratios, the higher costs of fuel, the expanding credit card debt, the skyrocketing health care costs, and the ever shrinking job opportunities.

At the same time, some of our political leaders clamor for making the tax cuts for the wealthiest Americans permanent and lowering the corporate tax rate from 35 to 25 percent. I don't know about anyone else, but these refund checks remind me of the dynamics underlying "the world's oldest profession"...the one where one party gets poked for a few bucks by the fat cat who realizes that money can buy him anything he wants.

In the end, getting the powers that be to speak the "R" word is an exercise in relabeling. After all, once the deed has been done and the hush money has been paid, does it really matter what we call an old fashioned screwing? I think not.

Tagged as: economy, bush administration, recession, federal reserve, bernanke

Daniel DiRito is a blogger of The All Spin Zone