US Economy
US economy will soon see best years in a decade
By Michael Hennigan, Finfacts founder and editor
Feb 3, 2015 - 2:51 AM

Printer-friendly page from Finfacts Ireland Business News - Click for the News Main Page - A service of the Finfacts Ireland Business and Finance Portal

Despite an easing of growth in the fourth quarter, the White House, Congressional Budget Office (CBO) and Federal Reserve unanimously see the US economy on the cusp of the best years for the economy in a decade or more.

The Wall Street Journal says that in its latest round of economic forecasts, released Monday with the president’s budget, the White House sees the unemployment rate falling below 5% by the end of 2016, the lowest since before the recession. The White House sees growth of 3% this year and in 2016–the best back-to-back years since 2004 and 2005.

“The U.S. economy has substantial room for growth, although there are factors that could continue to limit that growth in the year ahead,” the White House report said. On the positive side, the report noted declining unemployment, support from Federal Reserve policy, and pent-up demand as consumers regain confidence after nearly seven years of economic doldrums. On the negative side, the report sees lingering effects of the credit crisis and continued weakness in European and Asian economies.

The White House forecasts growth of 3% over 2015 from the fourth quarter of 2014 to the end of 2015. That compares with 2.9% for the CBO and forecasts between 2.6% to 3% for most Fed policy makers. By 2017, the White House sees 4.9% unemployment–better than the CBO’s forecast of 5.3%–but in line with Fed forecasts of between 4.9% and 5.3%.

We reported last week that real US GDP rose an average of 3.4% per year from 1960 through 2007, according to economists at ratings agency Standard & Poor's. They said in 2010 that they expected growth to average only 2.6% over the following decade. The CBO said growth will average 2.5% in 2014-2018.

"The only function of economic forecasting is to make astrology look respectable," John Kenneth Galbraith (1908 - 2006), the renowned US (Canadian-born) based Harvard economist once said and absent the study which the Department hasn't released, it's a reasonable assumption that the economic consultancy used official data, which without familiarity with the Irish economy, are not the basis for making reliable forecasts.

The Journal also points to new research from the Federal Reserve Bank of San Francisco that offers an explanation for why the central bank keeps blundering with its growth forecasts.

The main issue is one that affects most of the economics profession, argue bank economists Kevin Lansing and Benjamin Pyle. Most forecasters believe participants in the economy act with rational expectations. “This theory, which is the dominant paradigm in macroeconomics, assumes that peoples’ forecasts exhibit no systematic bias towards optimism or pessimism,” the economists wrote. “Allowing for departures from rational expectations in economic models would be a way to more accurately capture features of real-world behavior.”

Other reasons Fed officials have been getting their forecasts wrong? The paper says they failed to identify building imbalances in the economy, of the sort that led to the Great Recession and its sub-par recovery. Also, there’s been an assumption monetary policy would work better than it did and forecasters’ “natural tendency” to make forecasts that build on the trend of past data, the paper said.


© Copyright 2015 by Finfacts.ie