Let's Hear It for Lousy 2011 Forecasts: Caroline Baum
(Corrects sixth paragraph to reflect real gross domestic income.)
It’s that time of year again when people in my line of work (“profession” is probably a stretch given the low esteem in which the media is held) look back and offer up top-10 lists or reminisce about the most memorable moments, good and bad.
For the economic forecasting community, year-end provides an opportunity to gaze into the crystal ball, or tweak the econometric model, and tell us what to expect in the next 12 months.
In an effort to combine the two traditions, I compiled a handful of forecasts that that didn’t come to pass in 2011 --for which we should be grateful!
1. Recession Redux
When the Bureau of Economic Analysis released its annual benchmark revisions to gross domestic product in July, it pared first-quarter U.S. growth to 0.4 percent from 1.9 percent.
The fear of an impending double-dip was palpable. Stocks tanked. Forecasters marked down their 2011 GDP forecasts. The Federal Reserve started to think about additional quantitative easing.
There was no recession in 2011, and the year is ending on a positive note. The economy is growing at an estimated 3.5 percent to 4 percent annualized pace in the fourth quarter. And there’s a decent chance the first quarter won’t look quite as bad after the BEA’s benchmark revisions this summer. The increase in first-quarter gross domestic income, the other side of the ledger, was revised from 1.2 percent to 2.4 percent after relevant source data on wages and salaries became available.
Policy makers see downside risks from the European debt crisis and weaker foreign demand. With U.S. exports to the region accounting for less than 2 percent of GDP, the economy may weather Europe’s gathering storm if our banking system isn’t affected.
2. Vive L’Euro!
The European currency union did not come apart in 2011, although it had a few near-death experiences requiring multiple summits. The end of the monetary union, or the departure of some of its members, may be a forecast ahead of its time.
In fact, the only surprise regarding the 11 countries that hitched their wagon to the common currency in 1999 and the six that joined subsequently is not that structural flaws emerged but that they took so long. The idea of 17 disparate countries living in peace and prosperity with a one-size-fits-all monetary policy, individual fiscal policies and no mechanism, or will, for cross-border transfers, seemed unworkable from the start.
3. Hundreds of Billions of Bunk
On Dec. 19, 2010, superstar banking analyst Meredith Whitney appeared on a segment of CBS’s “60 Minutes,” titled “Day of Reckoning.” Whitney warned millions of viewers to expect a “spate” of municipal bond defaults in 2011, amounting to “hundreds of billions of dollars.”
The total outstanding par value of muni bonds that went into default for the first time this year is $1.68 billion, according to a Dec. 13 report from Bank of America Merrill Lynch. The U.S. Census Bureau just reported that state and local government tax collections rose 4.1 percent in the third quarter from a year earlier, the eighth consecutive increase. The improved fiscal position prompted Fitch Ratings to raise its credit outlook on the states’ municipal bond ratings to stable from negative.
Although the future is always uncertain and Whitney’s forecast may yet prove prescient, for the moment 2011 looks to be her day of reckoning.
4. Hiding Under a Rock
The Fed’s balance sheet ballooned from about $900 billion in mid-2008 to $2.9 trillion today. Even though banks continue to hold $1.5 trillion of the new money as excess reserves, on which they earn 0.25 percent, gold bugs and hard-money types have been waiting for hyperinflation.
They’re still waiting. The annual increase in the consumer price index peaked at 3.9 percent in September before tapering off. The core CPI, which the Fed considers to be a better measure of inflation (until it looks worse than the overall index), continues to accelerate. November’s year-over-year increase of 2.2 percent is the biggest in three years and above the Fed’s implicit target.
Even if the policy makers stay too easy for too long, as is their wont, they have some breathing room before inflation goes hyper.
5. QE3 Stays in Port
The Fed’s growth forecasts have been falling as quickly as its balance sheet has been expanding. In an effort to do something, the Fed decided in September to lengthen the maturity of its Treasury portfolio while keeping its options open on QE.
The door may be closing on that option. The recent decline in weekly unemployment claims is signaling an improving labor market. Even housing is emitting faint signs of life. Pretty soon, Fed policy makers may find themselves contemplating a different sort of QE: quick exit.
6. Baked Alaska
Last year, former Alaska Governor Sarah Palin looked like a front-runner for the Republican presidential nomination. Palin, who clearly prefers tweeting to greeting heads of state, decided not to run before she could self-destruct, a lesson some other presidential hopefuls had to learn the hard way.
With forecasts and outcomes like these, let’s hope for more of the same in 2012.
(Caroline Baum, author of “Just What I Said,” is a Bloomberg News columnist. The opinions expressed are her own.)
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