Heading into 2006, most economists saw strong profit growth, increased hiring, and rebuilding after Hurricane Katrina driving the economy. Ken Mayland looked back--at prior periods when the Federal Reserve had raised interest rates--and saw a slowdown on the horizon. Mayland's bet that history would repeat itself made him BusinessWeek's most accurate economic forecaster for 2006, beating out Ian Shepherdson of High Frequency Economics by a slim margin.
Because Mayland runs his own economic consulting firm, ClearView Economics, from a home office outside of Cleveland, "I can't afford to look at all the indicators under the sun," the 55-year-old economist says. Rather, he starts with a trusted set of data to help shape his forecasts. Tops on that list is monetary policy. Mayland observed that when the Fed raises interest rates, "it always produces a slowdown of some magnitude."
As a result, he penciled in softer growth estimates for the second and third quarters of 2006 that were on target. Indeed, the only weak parts of Mayland's forecast were an expectation that the jolt to the economy from post-hurricane rebuilding would begin in the fourth quarter of 2005 and, similar to most economists, an underestimation of corporate profit growth.
Right now, his list of leading indicators points to even slower economic growth during the first half of 2007. Inventories are now growing faster than sales, a negative sign. "By looking at the ebb and flow of inventories," says Mayland, "you get good insight into when the economy is accelerating and decelerating." What's more, Mayland expects that the continued weakness in housing will take its biggest toll on consumer spending early in 2007.
What could be the biggest surprise of next year? According to Mayland, it may be a sharp slowdown in inflation, especially outside of food and energy. A softer economy will mean an easing of upward wage pressures and big drops in commodity prices. All in all, the economist believes that the current slowdown will turn out to be a pause that refreshes, much like 1995. That year, the economy slowed sharply in the first half but then bounced back strongly.
Mayland, an economist of 33 years and a graduate of the Massachusetts Institute of Technology and the University of Pennsylvania, has been working from home since 2000. That leaves him more time to spend with his wife and two sons, and more opportunities to grab his rod and vest for trout fishing. After spending so many hours knee-deep in economic data and traveling to meet with clients, Mayland says the intensity of fly-fishing helps to clear his mind. Judging by Mayland's performance in 2006, that's not just another fish tale.
By James Mehring