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Summary

  • As 2014 ticks away, it becomes apparent the GDP would not grow by the Fed's 3.0% forecast rate, yet the Fed did not revise its forecast until just now.
  • Once again, the Federal Reserve’s forecast that “stronger growth is right around the corner” (but it doesn’t ever seem to materialize) has become the norm. Markets clearly recognize this.
  • Stronger growth remains on the more distant horizon. This, however, is good for those concerned about increased interest rates, as rates are not likely to move higher anytime soon.

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2014 began with a level of optimism. Economists were forecasting the US economy would grow 3% this year, instead of the paltry 2% pace, where it has been for the prior three years. What a difference six months makes.

After GDP growth of 2.6%, in the fourth quarter 2013, the economy seemed to go off the rails.

Real GDP declined an estimated 1% during the Q1, racking up its worst quarter in three years. At that point, it became apparent that it would be virtually impossible to achieve 3% growth for 2014. Indeed, to get to 3% GDP growth, the economy would have to grow at a 4.5% annual pace for the next three quarters in a row. The United States has not achieved that level of growth since late 2003 to early 2004. Notwithstanding, well into the second quarter, after the disastrous first Quarter and a slow start to the second quarter, the Federal Reserve maintained its original GDP growth forecast of close 3% for 2014.

Unfortunately, the second quarter is only looking slightly better that the first. While some blame the deep freeze for causing the very weak start to 2014, but there is certainly more to that story as it is crystal clear that the momentum has faded in the U.S economy.

Looking beyond the weather, the housing market stalled, businesses invested less money in new equipment and buildings, and exports declined.

The lack of momentum continues as the days go by. It is increasingly evident that any economic rebound will likely not be strong enough to completely offset the terrible first quarter. Yet no word from the Fed.

Halfway through the year, forecasts for the US economy were slashed across the board. First, the World Bank announced that it was cutting its prediction for the United States as well as the broader world economies. Then, the International Monetary Fund stated it expects that the U.S. economy would only grow 2% this year, down from it earlier forecast of 2.8%. Yet, again, the Federal Reserve remained strangely, if not unrealistically optimistic.

So finally, on June 18, one week before the next and final Q1 GDP numbers are released, the Federal Reserve adjusted its forecast, stating it now expects GDP growth of 2.1% to 2.3% for the year, down from 2.8% to 3%. As, once again, the Federal Reserve's forecast that "stronger growth is right around the corner"; but doesn't ever seem to materialize, has become the norm. This is (somewhat) tantamount to the notorious "the check is in the mail" or "trust me" statements.

Despite the revised forecast for 2014, the central bank left its forecasts for 2015 and 2016 growth unchanged…. but we know how that book ends, yet another revision. Certainly, not the way to build creditability.

Stronger growth remains on the more distant horizon. This however is good for those concerned about increased interest rates, as rates are not likely to move higher anytime soon.

While the Fed revised its GDP forecast, it's still too little and. quite obviously, too late. To be useful, a forecast must be "a prediction of future conditions or events". After all, a "forecast" well into the prescribed time, (in this case 2014) is merely a statement of the obvious. While there is a need to maintain confidence for the markets, credibility of forecasting is built on consistency, transparency, timeliness and accuracy. To this end, the markets appeared to have ignored and already priced in the "revisions", as there were no material reactions to Ms. Yellen's statement of the obvious, other than "here we going again, another revision" and "a lot of words, not much to say."

In today's environment, with significant political unrest in Iraq, Afghanistan and the greater Middle East, maintaining 2.1% GDP growth is a tall order. Especially should there be an interruption in oil supply, in the US (and across the globe).

Given that consumers contribute some 70% of GDP, the trickle-down impact of increased oil prices on prices of food, general merchandise, air and auto travel, heating oil, etc… not to mention consumer confidence will likely curb consumer spending. Thereby, likely retarding GDP growth even more.

A credible forecast, at this point, is that, the Fed will once again revise/lower its forecast for GDP growth for 2014 and quite likely beyond.

Note: In previous articles, I urged both the former and current chair to act cautiously given the very unstable recovery and the increasing economic "clouds" on the horizon.

Disclaimer: The opinions stated above are just that, my opinions. This is not a recommendation to buy or sell any security or any other financial instrument.

Source: Chair Yellen, Where Have You Been? Fed Lowers GDP Forecast Again - Why So Long?