Fed Sees Good News in One Closely Watched Forecast: John Berry
John M. Berry is a columnist for Bloomberg News. The opinions expressed are his own.
March 25 (Bloomberg) -- Federal Reserve officials, even the few who are skilled economic forecasters, pay constant attention to the ebb and flow of predictions from private economists with good track records.
Among the most closely watched are the forecasts from Macroeconomic Advisers in St. Louis, the latest of which seems almost too good to be true:
For the rest of this year and 2005, the U.S. should see the heady combination of strong economic growth, payroll job gains running about 200,000 a month, additional increases in corporate profits, significant gains in stock prices, only moderately rising long-term interest rates and continued very low inflation.
The key message in the forecast for both policy makers and investors is that all those good things can coexist.
Even payroll growth that strong need not trigger Fed action to raise its 1 percent target for overnight rates until early in 2005 because inflation will remain subdued, the Macroeconomic Advisers economists argued.
The Slack
Some investors are probably braced for a hit to the bond market whenever the Bureau of Labor Statistics announces the first monthly gain of 150,000 to 200,000 jobs. It will take several such months before Fed officials become convinced such gains are here to stay.
In addition, even with 200,000 more jobs per month, it will take a long time to whittle away a significant amount of the slack in labor markets. Such job gains would be ``just enough to nudge the unemployment rate down to 5.5 percent by the end of this year and 4.9 percent by the fourth quarter of next year,'' Macroeconomic Advisers predicted.
Keep in mind what has happened during the past five months. Payrolls increased by an average of about 60,000 a month, not enough to keep up with a normally growing population.
``There's every reason to think, in some conceptual sense, slack in the labor market is rising, even though we had this modest increase in jobs recently,'' J. Alfred Broaddus, president of the Richmond Federal Reserve Bank, said Monday in a Bloomberg interview.
Similarly, in a speech also on Monday, Michael Moskow, president of the Chicago Federal Reserve, said, ``There's positive job growth. It's not at the rate that we would like; we'd like to see it closer to 150,000 jobs per month.''
Hope and Expectation
Both officials expressed hope and expectation that faster job growth is on the way.
Broaddus and some of his Fed colleagues are concerned that continued sluggish job growth could limit personal income gains and hurt consumer spending later this year.
In its latest forecasting exercise, Macroeconomic Advisers concluded that wasn't likely, if strong productivity growth is the reason few additional jobs are created.
If productivity grew at about a 4 percent pace this year instead of the 3 percent rate assumed in the base forecast, labor compensation and unit labor costs would rise less, profit margins would widen and inflation would slow. After about six months, a combination of factors produces slightly faster economic growth than in the base forecast, according to the simulation.
Oh, and to keep inflation from turning negative in the analysis, Macroeconomic Advisers had to eliminate any assumed Fed tightening during 2005.
The exercise also is a reminder of just how much the amount of slack in U.S. labor markets matters in the nation's underlying inflation rate.
Commodity Prices
A growing number of economists and analysts are concerned that sharp increases in commodity prices -- and increases in prices of imports related to the falling dollar -- will soon begin to affect U.S. consumer prices.
Most Fed officials, including Moskow and Broaddus, don't share that view.
``We're still slightly more concerned about the downside on inflation rather than the upside,'' Moskow said. ``And that's because of the output gap. Our actual output is still below our potential and we have to grow above our potential for a certain period of time in order to get past that problem.''
Broaddus, who has devoted his long career at the Fed to fighting inflation, now thinks inflation is dangerously low.
``I feel a little nervous saying it, that I'd like to see a little more inflation after all these years, but I'd like to see it stabilize and move slightly in the other direction,'' Broaddus said.
The Risks
Neither Moskow nor Broaddus is a voting member of the Federal Open Market Committee this year, though their views likely carry as much weight in Fed discussions as most of the voting members.
And their comments suggest the Fed is a long way indeed from raising rates.
Of course, the sanguine predictions in the Macroeconomic Advisers' forecast are only that, predictions. As its economists readily acknowledge, an array of risks could produce far less desirable outcomes.
For example, the inflation push from rising commodity prices -- including oil -- and the higher cost for imports could have a greater impact on retail prices than expected.
Or productivity growth could slow so sharply that hefty employment gains would rapidly eat away the slack in labor markets, push up wages, unit labor costs and core inflation.
Either development could force the Fed to raise interest rates sooner and much more rapidly than assumed, hurting U.S. economic performance.
On the other hand, consumer and business confidence could falter. In that case, gains in consumer spending and business investment might be smaller, with economic growth held well below the 4.6 percent annual rate Macroeconomic Advisers expects for the first three quarters of this year.
Another serious threat to any forecast these days is a terrorist attack on the United States, with unpredictable consequences for the economy. |
