May 20, 2003

Yet Another Downward Forecast Revision

Yet another downward revision in the growth forecast.

Yahoo! News - Economists Lower U.S. Growth Forecasts: Economists have cut their U.S. growth forecasts for the current quarter and the whole of 2003, a Federal Reserve (news - web sites) Bank of Philadelphia survey said on Tuesday.

Economists expect gross domestic product to grow by 2.2 percent this year, down from their previous prediction of 2.5 percent made three months ago, the Fed bank said in its quarterly Survey of Professional Forecasters...

Posted by DeLong at May 20, 2003 03:36 PM | TrackBack

Comments

2.2% growth in 2003 and 3.6% growth in 2004 will insure the continuation of 6% plus unemployment and a substantial GDP (Okun's) gap. I guess the political question in Karl Rove's office is whether this is bad news for Nov. '04 or another excuse to push for a tax cut as they blame Daschle, Clinton, etc. But a substantive question - any clue as to the forecasts for the components of GDP - especially investment demand?

Posted by: Hal McClure on May 20, 2003 04:58 PM

Hal:

the forecasts for GDP components and other standard macro times series are at

http://www.phil.frb.org/econ/spf/index.html

Look at 'historical data' in particular.

Posted by: stefan on May 20, 2003 07:09 PM

Hal:

the forecasts for GDP components and other standard macro times series are at

http://www.phil.frb.org/econ/spf/index.html

Look at 'historical data' in particular.

Posted by: stefan on May 20, 2003 07:12 PM

You seem to have hit on a solution over there in the US - a 'beggar my neighbour' devaluation. It should give you a nice temporary growth fillip in a year or so's time. I'm tempted to suspect that the Bushies deliberately tried to look like a banana republic junta to bring the devaluation about (nah, no way - it's too convincing to be an act).

The neighbours being beggared (buggered?) are those like mine - Australia - who have made a killing from their undervalued currency (we've taken a lot of export markets from both the US and the EU).

Oh, and the ECB should be panicking - this has got to greatly boost the chances of a European deflation.

Posted by: derrida derider on May 20, 2003 08:53 PM

You seem to have hit on a solution over there in the US - a 'beggar my neighbour' devaluation. It should give you a nice temporary growth fillip in a year or so's time. I'm tempted to suspect that the Bushies deliberately tried to look like a banana republic junta to bring the devaluation about (nah, no way - it's too convincing to be an act).

The neighbours being beggared (buggered?) are those like mine - Australia - who have made a killing from their undervalued currency (we've taken a lot of export markets from both the US and the EU).

Oh, and the ECB should be panicking - this has got to greatly boost the chances of a European deflation.

Posted by: derrida derider on May 20, 2003 08:54 PM

I think that AG blew it by raising interest rates in the late 90s. Bush is blowing it even more by failure to provide the proper fiscal stimulus. They both deserve to be fired.

Posted by: bakho on May 20, 2003 10:01 PM

I wonder about the depreciation of the dollar. It seems that any gain in export advantage would be negated by the slowing of capital inflows to the US. If slow, steady depreciation is expected, money wouldn't want to come here (especially given current interest rates)...
Isn't the size of inbound capital flow a magnitude larger than trade in goods?
Of course, a one time devaluation, with a credible committment at the new level would take care of it, I guess.
Higher priced Chinese imports might give our domestic competitors a little pricing power, easing some deflation worries.
Is any of that right?

Posted by: andrew b. on May 21, 2003 01:30 AM

Forecasts: I thought economists' forecasts of growth had a terrible track record. William Sherden's The Fortune Sellers documents forecasting in general as being less accurate than chance. Does anyone have data showing a higher degree of reliability?

Posted by: richard on May 21, 2003 03:39 AM

Worth noting is that, in addition to a downward revision to GDP forecasts, there was a nearly offsetting upward revision to the median inflation forecast in the Philly survey. The implied nominal growth rate in the Philly median estimate was down just 0.1% from 3 months earlier. These guys don't seem concerned about deflation. Of course, that's this year, for which much of the outcome is already baked in the cake.

Andrew B,

Deutsche Bank has an analytic piece out which notes that the continued fall in US interest rates is probably a comfort to US policy makers, as it allays the concern over financing the current account deficit. At least for now, foreign demand at US bill auctions is tremendous. That is at least in part because the debt ceiling threat raises the prospect that US bills will become scarce, inadequate to meet portfolio needs. What happens after the debt ceiling is raised? Heck, I don't know.

Posted by: K Harris on May 21, 2003 04:06 AM

You left out the part about the survey suggesting that the economy will grow 3.4 percent in the last two quarters.

All considered, it's hard to see how things can help but get better with lower oil prices, new fiscal stimulus, a weaker dollar, and a lot of geopolitical risk behind us. (Not to defend the Administration...)

Posted by: Jim Harris on May 21, 2003 05:03 AM

AG today told Congress that signals were mixed. He cited uemployment and production numbers but suggested that they were due to pre-Iraq war decisions.

The summer jobs picture is bad. There are coop students still looking for internships.

Posted by: bakho on May 21, 2003 07:58 AM

Jim Harris writes:
>You left out the part about the survey suggesting that the >economy will grow 3.4 percent in the last two quarters.
>
>All considered, it's hard to see how things can help but
>get better with lower oil prices, new fiscal stimulus, a
>weaker dollar, and a lot of geopolitical risk behind us.
>(Not to defend the Administration...)

If the long-run growth rate in the economy is around 3.4%
annually, then I think the forecast for that growth rate in the last two quarters corresponds either to a belief that the situation will be "normal", or an uncertainty about which of the positive factors you suggest or the possible negative ones (deflation, renewed terrorism fears, huge decreases in state and local spending, continued weakness in the job market) will dominate the profile.

I think it will be interesting to see how the new, weaker dollar plays in the short run. In the long run, it was probably unavoidable. We might have needed this, but as others have pointed out, this won't really help Europe much.

Posted by: Jonathan King on May 21, 2003 08:47 AM

Bakho

On monetary policy in 1999, some economists were suggesting the FED's interest rate increase was too little, too late. I know of no economist that claimed in 1999 that the U.S. economy was sufferring from a lack of aggregate demand. I do realize that Lawrence Lindsey claims the 2001 tax cut was perfectly timed (certainly not perfectly designed) but when he drafted this idea in 1999 he was not publicly saying he expected a recession. Yes, the National Review pundits are not saying the FED should not have tightened monetary policy but did they forecast a recession publicly?

Posted by: Hal McClure on May 21, 2003 10:15 AM

The Philly FED publishes some of the details of these new private forecasts. It would seem that net exports are expected to slide despite the weaker dollar. They expect some pickup in fixed investment but not enough to get us back to 2000 levels. Consumption is expected to continue to grow and Federal purchases are expected to grow by over 5% per year in real terms while state purchases are expected to grew at just over a 1% per year rate.

Posted by: Hal McClure on May 21, 2003 11:21 AM
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