Tuesday, November 18, 2008

The wavering U.S. forecast

Here's an interesting bit from Laurence Meyer - Vice Chairman and Director, Monetary Policy Insight- at Macroeconomic Advisers, a venerable forecasting firm. From Real Time Economics:
Former Federal Reserve governor Laurence Meyer, sharing his forecast to the group of 100 CEOs, said the economy is on track for the second-worst recession since World War II. “There is a risk that it would be the steepest decline in the post-war period,” he said.

Without further action on monetary and fiscal policy, the economy faces “a lot of downward momentum right now” with an annualized 4% decline in economic output in the fourth quarter and 2% in the first quarter before struggling back to growth. Mr. Meyer, vice chairman of forecasting firm Macroeconomic Advisers, said the unemployment rate would peak at 8% to 8.5% by the end of next year.

What would make it worse? The housing correction could run longer than anticipated, equity prices could decline sharply or credit conditions could continue to deteriorate, Meyer said.

Over the last 10 days “we’ve seen some stabilization in some measures of credit conditions” but little overall improvement, he said. The credit problems also could still lead to more economic troubles.

With housing prices, Mr. Meyer said, “I think the best we can hope for is that we’ll see a deceleration in the rate of decline” with stabilization by end of 2009 and into 2010. So house prices would continue to fall “but at a slower and slower rate.”

Is the Fed out of ammunition to stimulate the economy? he was asked. “There’s room between 1% and zero. I think we can say with confidence that the Fed isn’t out of room,” Mr. Meyer joked.

He expects the Fed to cut its interest rate target by half a percentage point, to 0.5%, perhaps at its December meeting. “The question that we struggle with is zero or half percent for an extended period of time.” The Fed also will roll out “nonconventional policy options” by managing expectations and purchasing longer-term Treasurys to push down longer-term interest rates, which are more important to influencing the economy than short-term rates. (The Fed’s problem earlier this decade was not being too low for too long, he said, but that the central bank didn’t raise rates in an “aggressive enough fashion.” Federal Open Market Committee members will be mindful of that, he said, but the economic weakness and rising unemployment rate into 2010 may keep the Fed from tightening policy.)

“If you want to know what members of the FOMC are saying around that table, they’re praying a lot for fiscal policy,” Mr. Meyer said. “It’s really difficult to get timely fiscal policy, but we really need it now.”

Mr. Meyer’s criteria for fiscal stimulus echoed those of former Treasury Secretary Lawrence Summers: it needs to come by early next year, be substantial (around $300 billion to $400 billion) and have a sustained impact for two to three years.

Direct rebates to consumers should be avoided because they’d be short-lived with a shallow effect on the economy. “Politically it might feel good but economically it isn’t very effective,” he said. Among his guidance: Tax cuts implemented through lower tax-withholding rates would be a start. Government spending programs have the “most powerful” economic effect because unemployment benefits and food stamps are spent entirely. Infrastructure spending may ramp up slowly, but the sustained support for the economy over several years would be useful, he said.

“We’re not talking about an ordinary recession,” Mr. Meyer said. “We’re talking about something which is very severe and arguably could be the worst downturn since the Great Depression. … We simply can’t be constrained in the short run by the budget deficit. We’ve got to do what we’ve got to do.”
Rebecca here. My firm subscribes to Macroceconomic Advisors, Laurence Meyer is the Vice Chairman and Director, and their forecast has obviously changed substantially since just November 7, 2008.

In this article, Meyers states:
  • Q4 2008 growth will be -4% q/q annualized
  • Q1 2009 growth will be -2% q/q annualized
  • Unemployment will peak at 8% to 8.5%

And on November 7 - just 11 days ago - Macroadvisers (Meyers) forecasted:

  • Q4 2008 growth will be -3.8% q/q annualized
  • Q1 2009 growth will be -0.4% q/q annualized
  • Unemployment will peak at 7.6% in Q3 2009

There is no economic constant in this environment. Forecasts are changing by the minute.

Rebecca Wilder


  1. This was really interesting to hear. Everything seems to be a moving target as Meyer's forecasts show and you are indicating. Thanks for reporting this.

  2. Did you hear Former Fed president Bill Poole on Bloomburg?


  3. I am a new entrant here, pardon the brevity of my comment, but I've had trouble joining the forum.
    [qt]# Q4 2008 growth will be -4% q/q annualized
    # Q1 2009 growth will be -2% q/q annualized[/qt]Obviously those have risen since the previous forecast, and indicate a deeper and longer errr...I defer from the term 'rececession'...'downturn'...and yet the unemployment figures, in relative terms to previous *acknowldeged* recessions, really aren't that bad at all.

    Something is very askew. And then...the Detroit dilemma....

    I will have more comment to make other than questions. That's too easy.

    First, I'll see if this posts.

    Stephen Saines

  4. The problem of gaining forum access was confusion as per the choices of 'identity' one sees to the lower right of the page. That's thrown me with other forums too, and I can still make neither head nor tail of it. Whatever...

    Further to the 'Detroit Question' and how that affects unemployment figures.

    The NYTimes has been harsh of the 'bailout' cause, for good reason in my estimation. Mitt Romney writes an excellent Op-Ed piece http://www.nytimes.com/2008/11/19/opinion/19romney.html
    and apart from the immediate topic, it indicates a massive faux-pax in the selection of Palin in his stead. Can anyone imagine Palin writing such a cogent and intelligent insight?

    Romney clearly makes the case to let any of the Big Three go into Chapter 11 rather than be supported. Either way, there's going to be massive redundancies. Support them? I say not. It offends the sensibilities of Democrats as well as Republicans on the street. There's immense resentment as it is of the banks being propped up, and to Joe Sixpack, the wonderment is still when he/she sees direct benefit.

    Rebecca's posted Meyer figures seem to indicate little benefit from the massive intervention so far. It might be correct to say: 'Ah, but it prevented complete meltdown'.

    Can anyone provide figures to support that contention?

    Make no mistake, I'm a Centrist (I'm a Brit/Cdn Dual, and I ate back bacon today, eh?), but Joe Sixpack's take on events appears as solid as anyones.

    Paulson's making it up as he goes along certainly degrades what little substance there was to begin with.

    Is the equation that simple? Obviously not...but when factored, one is left with a product little different, if different at all, than monetary non-intervention would produce.

    I get the distinct impressions that intervention was/is necessary, but not in this manner.

  5. Paul!
    Just followed your 'headsup'. I'm using Ubuntu (my first week, I highly recommend it to frustrated Windows users),and it would not run Bloomberg's player of preference, but managed to download the codecs to run it on Unbuntu (Linux).

    Bill Poole has always been a bit of a 'loose cannon', but his following comments on Price Index and 'Deflation' (the word is being abused again, at this stage it is Disinflation, the UK Press are truly abusing it) was a good test of character believability. 'Loose cannons' are inherently suspect...but I take his points at face value. He makes a truly troubling one,,,and the inference of Paulson being a 'sideshow' (my take) is well taken by me. A possibility of what is happening?

    Bernanke and Crew are taking initiative behind the scenes. There are tensions bubbling to the surface between Paulson and Bernanake, for very good reason, as becomes obvious as things progress.

    Then again, it might be one of those 'tears in the continuum' that stats produce.

    But one really has to wonder! I much prefer text to video, so I'm going to dig on that story. If anyone could spill the beans on things of that nature, it would be Poole. He has not hesitated in the past.


    Greetings, btw, from the Evil East! I'm in Toronto. I see you're in Wild Rose Country.

    I must say Harper seems a bit more...mmmm...Centered this time around. So far, so good. Clement and Flaherty actually seem level headed.

    The interplay across the US border will make for some interesting discussion in these fora later.

  6. At the risk of appearing to be a compulsive poster, I must add this re Paul's excellent lead:
    Today's Bloomberg :
    (and in print, which allows much greater absorption on the part of the reader/viewer:)

    Bernanke's Cash Injections Risk Eclipse of Fed's Benchmark Rate


    It directly quotes Poole, Yellen and others, and puts a perspective to Poole's claims.

    I suspect Rebecca will wish to post it in full. It would seem to tie in with a few other stories on 'where has the cash gone?'.

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