The Federal Reserve Board said David Stockton, its head of U.S. economic research and forecasting since 2000, is retiring Sept. 30 after three decades at the central bank.
Stockton, 57, leads 325 people as director of the Division of Research and Statistics, the Fed said today in a statement in Washington. No successor was named.
Stockton is one of the three top Board of Governors staff officials who brief Fed policy makers on interest rates and U.S. and international economic developments. Like most forecasters, he didn’t foresee the speed and depth of the collapse in the housing market last decade, which led to an 18-month recession.
“This was a problem in economics, not one specific to any one forecaster,” said Vincent Reinhart, who worked alongside Stockton as director of the Fed’s monetary-affairs division from 2001 to 2007. “Low-frequency events, things that don’t happen very often, are very hard to pick out of the data,” he said.
Stockton’s efforts to improve computer models and data collection only focused on a “limited slice” of information, he said, adding that academic papers have found the Fed’s projections to be more accurate than private forecasts. Reinhart is a scholar at the American Enterprise Institute in Washington.
Since the meltdown in U.S. mortgage finance the central bank has overhauled how it looks at financial risk and its linkage to the economy. Stockton now sits on a multi-disciplinary committee that studies large financial institutions and specific markets. His staff monitors financial stability in greater depth as part of Fed efforts to more closely track how events such as a European sovereign default may cause market instability and harm U.S. economic growth.
“I don’t think a central bank can exist today without a dedicated financial stability operation,” said Roberto Perli, a managing director at International Strategy & Investment Group in Washington and a former Fed Board staff economist. “It is a step in the right direction.”
As division head, Stockton also has some say over the Fed Board’s research agenda. On top of his list of priorities these days is figuring out how the contraction in 2008 and 2009 may have left a lasting imprint on company and consumer behavior. Unemployment, for example, stood at 9 percent in April despite seven consecutive quarters of expansion. Stockton’s staff is now probing whether this is temporary or more permanent, and studying what the long-term consequences for income might be.
Stockton has always expressed a realistic view about the ability of economists to predict the course of an economy as big and diverse as the U.S., said former Fed Governor Laurence Meyer.
“Stockton always understood the inherent uncertainty in any forecast,” said Meyer, co-founder of the St. Louis forecasting firm Macroeconomic Advisers LLC. “He never oversold to the committee.”
At the interest-rate meeting in December 2005, Stockton presented a forecast that growth would slow to about its long-term trend, an outlook he acknowledged “seems too good to be true,” according to a transcript. Still, he also said that “obviously, there are some very important risks on both sides of our forecasts for real activity and inflation.”
In August 2007, the Fed staff “lowered somewhat its forecast of real GDP growth in the second half of 2007 and in 2008,” minutes of the meeting said. The worst recession in seven decades, brought on by the housing-market bust, began in December 2007. The contraction was the longest since the 43-month slump during the Great Depression, according to the National Bureau of Economic Research.
Stockton, known for his sense of humor, could mix statistical analysis with anecdotes. At the same December 2005 meeting he told Fed governors and regional-bank presidents that the creation of “Flip That House,” a television show, suggested that the housing boom would soon end.
“As far as I could tell, the gist of the show was that with some spackling, a few strategically placed azaleas and access to a bank, you too could tap into the great real estate wealth machine,” Stockton said, according to a Federal Open Market Committee meeting transcript released in January with other 2005 transcripts, the most recent year available.
The other two top staff economists are William English, director of the Division of Monetary Affairs since July, and Nathan Sheets, who’s headed the Division of International Finance since 2007.
While the Fed now discloses the ranges of economic growth, inflation and unemployment projections of governors and regional-bank presidents after FOMC meetings, the central bank keeps secret for five years the forecasts of Stockton and his staff. FOMC minutes, released three weeks after each meeting, use qualitative, rather than quantitative, language to describe the staff projections.
“Dave Stockton is one of the finest economists I have known,” Chairman Ben S. Bernanke said in today’s statement. “My colleagues on the Committee and I have enjoyed the benefits of his penetrating and insightful analysis and impeccable judgment.”
One possible successor to Stockton is David Wilcox, his top lieutenant, Reinhart said.
In addition to advising the FOMC, the research division, which includes 111 economists with doctorates, produces statistical releases including the Industrial Production and Flow of Funds reports as well as research to support the Fed’s responsibilities in financial stability and bank supervision.
Stockton’s job is turning the underlying data of staff forecast -- including discrete calculations by specialists in inflation, investment and spending -- into a broad narrative about how the economy is performing.
“It is a complicated and iterative process that needs outstanding leadership,” Meyer said.