From The Wall Street Journal:
President Trump has set a goal of generating 4% annual growth by overhauling the tax code and rolling back regulations, among other measures
By Ben Leubsdorf and Eric Morath | Updated Jan. 27, 2017 8:50 a.m. ET
WASHINGTON—The U.S. economy decelerated in the final three months of 2016, returning to the familiar pace of growth that has marked the long but lackluster postrecession expansion.
Gross domestic product, a broad measure of the goods and services produced across the economy, expanded at an inflation and seasonally adjusted annual rate of 1.9% in the fourth quarter, the Commerce Department said Friday. That was a slowdown from the third quarter’s 3.5% growth rate, which had been the strongest reading in two years.
Economists surveyed by The Wall Street Journal had expected a 2.2% growth rate in the final three months of 2016.
Oh, so the professional economists once again got wrong not their estimates on what is gong to happen, but on what has already happened. More, they got it wrong by a fairly large margin: the 0.3% they missed by equals 13.64% of the 2.2% they had misguesstimated.1
Don’t let the title of the Journal article fool you. It was based on the annualized growth rate of the fourth quarter, but the real GDP growth for all of 2016 was lower. CNNMoney reported:
by Patrick Gillespie | January 27, 2017: 9:17 AM ET
America had another year of sluggish growth.
The U.S. economy grew at an annual rate of 1.6% in 2016, the Commerce Department reported Friday.
In the last three months of the year — between October and December — the economy grew at an annual rate of 1.9%. It’s the slowest pace of growth since 2011.
It reflects how slow the recovery has been for many Americans since the Great Recession, which ended in 2009.
Weak economic growth was a key reason behind President Trump’s election. He promises to get growth up to 4% a year, something that hasn’t happened since the late 1990s.
As usual, there’s more at the original. Back to the Journal article:
The nonpartisan Congressional Budget Office this week projected GDP would grow 2.3% in 2017 and 1.9% in 2018. The agency said structural trends, including baby-boomer retirements, are driving a slowdown in economic growth compared with past decades.
Will that 2.3% real growth be realized? Estimates by economists keep coming in higher than real results, and the CBO’s estimates ate higher than those of the Federal Reserve. Note, from the chart at the right, that the Fed raised its GDP estimates for 2016 from 1.8% in their September meeting, to 1.9% at the December conclave. Not noted on the chart is the fact that the September estimate was actually a downgrade from the June meeting, when the Federal reserve Board of Governors had forecast 2.0% real GDP growth for 2016.
The interesting part, to me, is that not only are they always getting it wrong, the errors all seem to be on the high side, the optimistic side. If you look at the FOMC’s own figures, released after their December meeting, you will see that the projections ranges, from all of FOMC members, was 1.7 to 2.0% for the September meeting, and 1.8 to 2.0% for the December meeting, meaning that every single one of them was off to the high side; not a single FOMC member erred to the low side.
There will, of course, be an update to the GDP figures, as the Commerce Department gathers and includes more data, and the 1.6% figure for 2016 could change. However, given that the complete figures for the first three quarters are already in, it would take a very large change in the fourth quarter figures to drag the entire year’s GDP up to the 1.9% the Fed projected for the full year.
It’s one thing for economists’ estimates to be off, when those estimates are meaningless. However, when the Federal Reserve comes up with its estimates, they set monetary policy based on those estimates. I have said before that the Fed ought to just leave things alone, but that’s not how government works: government — and not just the Fed! — think that they just have to ‘do something,’ that doing something is their raison d’être, and there is an inherent bias against leaving things alone.
Last September, the Fed forecast that it would raise interest rates one time in 2016, which it did in December, and that 2017 would see a 50 basis point interest rate rise, which would normally be thought of as two 25 basis point increases. After the December meeting, the Fed projected a 75 basis point increase for 2017, presumably three 25 point increases. If the 2016 figures hold up, I would think that the Fed would hold off on a rate increase in the March meeting; at least they certainly should leave interest rates alone. Whether they will or not, well, who knows?
There remains the obvious question: what will the Trump Administration do, and how will it effect the economy? I’m not smart enough to give you that answer, but it seems that the public expect better things: consumer spending was down a bit in the fourth quarter, but where it remained steady was in durable goods. Business investment increased at a 2.4% clip, up from 1.4% in the third quarter. And, of course, investors seem to believe that things will go great guns, as the stock markets have set new highs in the past couple of days.
I guess that we’ll see how things play out, but one thing I am certain of: I won’t listen to the professional economists projections!
- Yes, I know: missguesstimated isn’t a real word, but somehow, it fits, kind of like President Bush’s famous misunderestimated. ↩