With The Atlanta Fed's slashing its Q1 GDP growth expectations to just 0.1%, consensus estimates for 2016 growth have collapsed. However, none of this should surprise anyone as this is the sixth year in a row that over-optimistic growth hopes devolve into hype for more stimulus and a hockey-stick just around the corner.
While expectations have not improved since 2010, at least one these dreadful soothsayers is defending this year's drop in the same old manner - by promising that H2 will be better, for these 4 reasons...
Downward revisions to 1Q Atlanta Fed GDPNow: For the third year in a row, forecasters came into the first quarter looking for 2%-plus GDP growth, only to steadily revise estimates lower.
We look at the Atlanta Fed’s GDPNow tracking for 1Q in each year. They are far from alone: both we and the consensus have been doing the same thing. This weakness adds to market skepticism about a June Fed hike. In both 2014 and 2015, we faded the weak 1Q data and argued that the recovery remained on track.
Today, we see four reasons to reiterate that call.
- First, outside of the GDP adding up, the data look fine.
- Second, some of the weakness is likely due to lingering seasonal adjustment problems.
- Third, the fundamental backdrop points to moderate growth, not a big slowdown.
- Fourth, and perhaps most important, with potential growth slipping below 2%, and given the normal variation in the data, we should not be surprised to see near-zero quarters on an annual basis.
Now where have we heard that before? It's different this year... i better be as whatever the 'authorities' are doing to save the world is not working. As Bloomberg's Richard Breslow notes, it is perhaps time, not extreme monetary policy action, that could be the cure...
All government policies, with the possible exception of those implemented through brute force, require a certain amount of trust and faith. For monetary policy this is particularly true. The theory is that if a central bank does one thing, lenders and borrowers will respond as expected. The much praised and maligned transmission mechanism.
Policy actions rapidly lose the ability to effect their purpose, or backfire, when financial market participants question the efficacy or indeed the sensibility of the prescriptions. It’s a lot more dangerous when those in charge of setting and implementing monetary strategy are among the disbelievers.
To be fair to bankers, (aren’t we always) one of the unfortunate consequences of the financial debacle has been an inexcusable and ongoing narrowing of how we define monetary policy. If you think of it as all policies that can affect the quantity and speed of the money supply, then there are many more choices than just benchmark rates and quantitative easing.
Tax reform and fiscal spending are among the tools that we’ve chosen to hold hostage rather than employ. The former on the grounds of partisan ideology and, I guess the latter, because governments are saving up for the next war.
Rates in Japan are less than zero, going well out the yield curve. The BOJ owns the bond market. How’s that working out for them? Europe has recessions and bank crises sprinkled all over the place. Both central banks want you to know they can still do more. To what point?
The IMF felt compelled yesterday to defend the concept of negative rates. Even they couldn’t muster more than, “we tentatively conclude that overall, they help deliver additional monetary stimulus.” By the way, they are expected to lower their global growth forecast yet again at this week’s meetings.
No one dares admit what negative rates will do to pensions, mortgages, savers and retirees. What they certainly won’t do is stoke animal spirits, lending and spending. They do prop up asset bubbles: as long as they never stop. I suspect the Fed worries a move to negative rates would be the last decision Congress would let them make.
The world is going to need the healing power of time, even if it means an extended period of low growth. It won’t be cured with extraordinary experimentation with the future.
Of course - that will not do for the short-termist equity wealth creation transmission channel.