Levy Institute whose forecasting record has been very good the last few years warns of "fales hopes."
MISLEADING STATISTICS, FALSE HOPES
Mount Kisco, NY, November 27, 2001- "Nothing scared the Treasury markets last week as much as
the 7.1% rise in retail sales in October, the largest monthly rise in half a century," according to the
Jerome Levy Forecasting Center. "But economic statistics are often not what they appear to be,"
says David Levy, Chairman of the economic forecasting and consulting firm, warning that judging the
trends in the economy will be unusually tricky in the next few months. "When something-whether
severe winter weather, the Gulf War, or the destruction of the World Trade Center-disrupts commerce
and production during one period, most of the lost activity is made up for during the next period. ...Do
not be surprised to see steep down-up patterns in several data series released over the coming
months."
However, most observers are not thinking about the bounce-back effect as they scrutinize the details
of the statistical reports for September and October. The financial markets, based on their behavior
so far this month, do not seem to have caught on to the temporary nature of this post September 11
effect, confusing it instead with a profound change in the economy’s direction. But there is little in the
data that suggests a legitimate recovery is underway and the Forecasting Center predicts that the
underlying downtrend will be reestablished soon.
The Treasury markets, which declined dramatically between November 7 and November 16, may well
have overreacted to the economic news, according to the Levy Forecast. As of Friday, November 16,
the market was expecting the federal funds rate to reach 4% by early 2003. Even if the economy
miraculously turned on a dime and appeared strong early next year, it is hard to imagine the Federal
Reserve becoming confident in the trend and deciding to take back any rate cuts until at least
February. Thus to reach 4% on the federal funds rate, the Fed would have to tighten by 200 basis
points in one year. Two full percentage points of rate hikes immediately following a recession has
occurred only twice before. One occurrence was in 1980, when the Fed was still battling double-digit
inflation. The only other time was in 1958, a completely different era in monetary policy.
Although the Forecasting Center does not make short-term stock market predictions, it does give out
warnings when it thinks that the market’s economic expectations are going to be proved dramatically
incorrect. At present, the predominant assumption in the market is that the current recession will be
followed by a solid recovery and rising profits in 2002. But, according to the Forecasting Center, even
if there is a recovery, 2002 profits will rise little if at all from their 2001 levels. Furthermore, given the
extraordinary risks and the powerful downward forces acting on the economy, profits could easily fall
well below this year’s levels. |
