Can We Trust The Moderate Growth Forecasts?

Another day, another economic forecast. The 35 economists polled for the latest Livingston Survey via the Philadelphia Fed project that real GDP for the U.S. will grow at an annualized 2.5% rate for the second half of 2011. That’s down from June’s 3.2% second-half 2011 forecast. Down, but still not out.

Looking ahead to 2012, the Livingston survey forecasters “see the growth rate of economic output slowing to 2.1 percent (annual rate) in the first half of 2012, and they predict that it will then increase to 2.5 percent (annual rate) in the second half of the year.” The economists also expect “a slow recovery in the labor market, with the unemployment rate at 9.0 percent in December 2011 and at 8.9 percent in June 2012.” Those unemployment predictions are up slightly relative to the June forecast.
The case for more optimism, or not, surely depends heavily on how the labor market fares. Yesterday’s weekly update on jobless claims provides a boost for optimism, courtesy of the substantial fall last week in new filings for jobless benefits. What’s needed now is supporting evidence that this was more than a statistical quirk. While we wait for fresh data, anecdotal reports from individual state economies suggest that growth may endure. For instance, consider these recent news items:
More workers will find jobs, employees will get raises and modest homes could increase slightly in value in South Carolina next year, according to economists at USC. But the economic recovery will remain fragile, according to Darla Moore School of Business economists Doug Woodward and Joey Von Nessen, who spoke Wednesday at the university’s annual economic outlook conference.
Utah’s economic forecast is improving, albeit slower than many would like, according to a national economic analyst. Anthony Chan, chief economist for J.P. Morgan Chase Wealth Management, told an audience of about 300 people that Utah has made “good progress” on the employment front, with lower unemployment than the national average.
In California, Turbulent Data Suggest a Turning Point, Economy to Continue to Grow, Albeit Slowly
The California analysis comes via the UCLA Anderson Forecast, which projects that the U.S. economy will grow at an annualized real 2% pace in the fourth-quarter of this year but at a “sub-2% growth rate for most of 2012.” In other words, the odds of a new recession appear to be receding, although the confidence for seeing the glass half full isn’t particularly strong.
Forecasts are made to be broken, of course. Reality is never quite what it seems until it arrives. What events might conspire to knock moderate expectations off the pedestal? Take your pick—the possibilities are, unfortunately, quite extensive these days. One risk that’s surely on the short list for monitoring is the potential blowback for emerging markets from the various ills infecting the developed world. International Monetary Fund deputy managing director Min Zhu, in a speech today, explains:

Major advanced economies seem to have entered a vicious cycle of weak economic activity, financial distress, and high public debt and deficits. Emerging economies, by contrast, show stronger fundamentals that have underpinned global economic growth so far. But these economies are not immune. In fact, vulnerabilities are increasing, and potential spillovers from advanced economies are weakening their economic outlook. It is not surprising that many Asian policymakers have publicly warned about growing downside risks and have begun to adjust their policy stances.

The good news is that the U.S. economy seems to be holding the line against the forces of contraction. But expectations have been raised. Meanwhile, it’s not yet clear that the moderate calls for growth of late will find support in the upcoming economic updates.
In fact, it’s best to brace yourself for trouble, warns Lakshman Achuthan of Economic Cycle Research Institute. In an interview with Bloomberg yesterday, he repeated his September recession prediction for the U.S. How can the economy be slipping into a new downturn in the wake of recent improvement in some economic news? Achuthan makes his case here.