Fed's Lacker Slams Permabulls, Pours Cold Water On The US "Growth Story"
Unlike the other Fed presidents who are all too happy to lie in order to instill some confidence in a centrally-planned economy and market, not realizing that by doing so they hurt their own credibility, non-voting member Jeffrey Lacker and president of the Richmond Fed has a different approach - telling the truth. Which is why we read his just released speech this morning with interest since once again, it contains far more truth and honesty than anything else the FOMC releases. Sure enough, it has enough fire and brimstone to put even fringe bloggers to shame.
First, just as we have been warning for the past two quarters, all US growth was on the back of inventory - a trend which everyone now realizes is unsustainable. So does Lacker:
Economists' hopes have been bolstered of late by a recent string of data releases indicating that 2013 ended on a positive note. Second-half growth in real GDP — our broadest measure of overall economic activity — was stronger than we've seen in quite some time. While that figure was boosted significantly by inventory accumulation that is unlikely to persist, there was some evidence of momentum that might carry forward.
That evidence, however, is on the back of a consumer who may or may not be back and spending freely once more. To Lacker, it is "may not":
... It's no surprise that credit is no longer available on the same terms. And it's no surprise that consumers have been paying off debt and building up savings in order to restore some sense of balance to their household finances. These developments appear to have contributed to a persistent cautiousness in household spending. Over the last three years, real consumer spending has increased at an annual rate of 2.1 percent. Although consumption grew rapidly at the end of last year, we have seen similar surges since the last recession, only to see spending return to a more moderate trend. Consumer spending trends are likely to depend on whether the dramatic events of the last few years are only a temporary disturbance to household sentiment or if they instead represent a more persistent shift in attitudes about borrowing and saving. At this point, I am inclined toward the latter view.
Next, Lacker slams the permabulls and their perpetual optimism that an improvement is just around the corner:
Many forecasters are citing the recent surge as support for projections of sustained growth at around 3 percent starting later this year. It's worth pointing out, however, that this has been true at virtually every point in this expansion. In other words, ever since the recovery began, most forecasters have been expecting the economy to pick up speed in the next couple of quarters with the easing of headwinds that have been temporarily restraining growth. My own forecasts (at least initially) followed this script as well.
Despite these perennial hopes, the actual results have been more modest. Real GDP grew by 2.0 percent in 2011, 2.0 percent in 2012 and 1.8 percent for the first half of 2013. This record of relatively steady but modestly paced expansion, despite forecasts of an imminent increase in growth, helps motivate the more cautious economic outlook that I will share with you today.
Hoping that this is finally the year in which that long overdue CapEx spending will finally take place (and which is being halted by none other than the Fed as we explained nearly two years ago)? Don't.
Businesses also appear to be quite reticent to hire and invest. A widely followed index of small business optimism fell sharply during the recession and has only partially recovered since then. Interestingly, when small business owners were asked in the latest survey about the single most important problem they face, 20 percent answered "government regulations and red tape." This observation accords with reports we've been hearing from many business contacts for several years now. They've seen a substantial increase in the pace of regulatory change and a substantial increase in uncertainty about the shape of new regulations. Both are said to discourage new hiring and investment commitments.
Then there is the government, whose absolute inability to craft any credible fiscal policy has hit record levels in the past years. Why? "Get to work Mr. Chairman" - after all why should politicians expose themselves to the risk of voter ire if the Fed can simply boost stocks higher and make it seem that all is well.
Adding to the uncertainty is the continuing cloud over our nation's fiscal policy. The most recent round of budget deliberations has certainly been a welcome relief from the recurrent legislative cliffhangers of the last several years. The lower odds of an imminent fiscal showdown may ease some business and consumer concerns, and that may aid growth. But overall government spending has been declining lately, and, given continuing fiscal pressures, that category is likely to make little, if any, contribution to GDP growth in coming years.
Next Lacker reminds the world of one more thing: even though the US budget deficit has improved in recent months, this is only a temporary phenomenon. Some time in 2015 the demographic tide will ebb and the amount of spending on welfare and benefit will explode.
From a longer-run perspective, it's worth noting that current law still implies an unsustainable path for federal expenditures and receipts. My fear is that the recent decline in the federal deficit will dampen the sense of urgency about fixing the longer-run budgetary imbalance. The sooner we resolve uncertainty about how the costs of those fixes will be allocated, the better off we will be, I believe. Dealing with the federal budget sooner rather than later would allow us to spread the cost out over time and reduce the ultimate burden. Moreover, it would remove a potentially important source of uncertainty hanging over investment and spending decisions.
Putting it all together, and Lacker gets 2014 GDP growth ofd 2%.
That leaves net exports, which for various reasons also are likely to contribute little to growth next year. Adding up all these categories of spending yields a forecast for GDP growth of just a little above 2 percent — not much different from what we've seen for the last three years.... The pickup in growth late last year is certainly a welcome development, and it may well be a harbinger of stronger growth ahead. But experience with similar growth spurts in the recent past suggests that it is too soon to make that call. My suspicion is that we will see growth subside this year to closer to 2 percent, about the rate we've seen since the Great Recession
Even that will prove optimistic.
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