Federal Reserve To Lower Growth Forecasts?

Includes: AGG, IYF
by: John M. Mason


The feeling is that the Board of Governors of the Federal Reserve System will lower its forecasts for economic growth at its meeting this week.

Lowering its forecast would be consistent with the lower Treasury forecast announced by Secretary Lew last week.

Does the Federal Reserve consider slower economic growth a cyclical phenomenon or could it be a result of a longer-term re-structuring of the economy.

The Board of Governors of the Federal Reserve meet this week, starting on Tuesday. The rumor is that the Board will lower its forecast of future economic growth.

This is less than a week since Jack Lew, US Secretary of the Treasury revealed that the federal government was lowering its forecast for future economic growth. The average number Lew gave for future growth was 2.1 percent.

The Federal Reserve has, most recently, in March, stated that it was expecting economic growth in 2014 to come in around 2.9 percent.

The feeling mentioned in the first article above was that the Fed will lower its expected growth rate below 2.5 percent.

The economy began the year with the first quarter growth of real GDP down 1.0 percent from the fourth quarter of 2013, but up 2.0 percent, year-over-year, from the first quarter of 2013.

This slow growth was attributed to the bad weather experienced by most of the nation.

Robin Harding writes in the article mentioned in the first paragraph from the Financial Times: "The economy bound back after the freezing winter-with two months of strong jobs growth since the Fed's April meeting-but there is little sign of wage pressures that would force the Fed to debate an early rise in interest rates."

The essence of this comment is that the labor markets are not really showing any signs about getting tighter…and this can be interpreted that there still is plenty of slack in the economy.

Many other analysts have been lowering their forecasts for the year. So, the federal government does not seem to be "out-of-line" with the general consensus that recent predictions about the future growth of the economy has been a little on the rosy side.

Harding writes that "The Fed has tended to be too optimistic on growth…because it assumed drags on growth would dissipate and people would return to the labor force. "

This has not occurred with the speed expected by the monetary authorities.

A little more positive note was hit on Monday with the release of the numbers for May on Capacity Utilization and Industrial Production.

Capacity utilization continued to increase coming to rest in May at 79.1 percent. This brings capacity utilization roughly to its cyclical peak. The index was at 79.3 percent in March.

However, this is still below the previous cyclical peak of almost 81.0 percent, which was achieved in the second quarter of 2007.

The rate of increase in industrial production picked up again reaching a year-over-year growth rate of 4.3 percent in May, up from 3.8 percent in April.

For the first quarter of 2014, industrial production was, on average, 3.4 percent above the level it was in the first quarter of 2013. So industrial production is increasing at a fairly strong pace.

Given the numbers I would argue that the economy is still showing some strength, but the strength it is showing is not that robust.

With the capacity utilization and industrial production numbers, one can argue that economic growth in 2014 will be in the 2.0 percent to 3.0 percent range. There remains a lot of uncertainty in the economy. About the only thing that can really be said here is that the economy will continue to growth into the sixth year of this recovery, but the growth is still going to be anemic and will not do a great deal to reduce the under-employment of resources in the economy.

The question that I still have for Federal Reserve officials is whether or not their interpretation of the data and the reduction in the forecast for real economic growth takes into account the fact that the United States economy may be facing a period of transition in which longer-term economic growth might be expected to be below the trend of the last fifty years which was slightly about a 3.0 percent annual rate of growth.

Treasury Secretary Lew gave some indication that this concern was a part of the lowering of the forecast for economic growth on the part of the Treasury.

As of this time, there is no indication that the Federal Reserve might be thinking in this way.

As readers of this blog know, I certainly think that this longer-term consideration needs to be incorporated into the thinking of Federal Reserve officials and how they are anticipating the rise in short-term interest rates.

Bottom line: the government now seems to agree that the growth of the economy in the near future will not be as robust as they once thought it might be. The economy then moves into its sixth year with "lower than average" prospects for the future. How this will impact policymakers is anyone's guess.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.