07.19.2013 0

Bernanke’s summer of discontent

By Bill Wilson

The second quarter is looking particularly grim for the U.S. economy, with forecasts being downgraded across the board by Wall Street. JP Morgan has cut its estimate for the Gross Domestic Product (GDP) in half to just 1 percent annualized from its previous 2 percent expectation.

Barclays has come down to 0.5 percent from its previous guess of 1 percentOther current estimates for a weak second quarter include Goldman Sachs at Macroeconomic Advisors at 0.6 percent and Royal Bank of Scotland at 0.5 percent.

The gloomy outlook comes atop the U.S. Bureau of Economic Analysis’ recent downgrades for the first quarter all the way down to 1.8 percent annualized. Meaning if JP Morgan’s apparently optimistic forecast of 1 percent in the second quarter is correct, the economy for the year is so far trending at 1.4 percent for the year.

All of which is bad news for the bean counters at the White House Office of Management and Budget, which in its most recent forecast that GDP for the year would be 2.3 percent.

The Fed itself said growth would be anywhere from 2.3 to 3 percent for the year.

They’re going to have to call 2013 the year of the walk back with all of this moonwalking going on. Of course, the rosy economic views of the Fed have been well-documented.

In Jan. 2008, the Fed saw no recession or financial crisis on the horizon. It projected between 1.3 to 2.0 percent real growth in 2008, and between 2.1 to 2.7 percent growth in 2009.

Instead, the economy contracted by -0.3 and -3.1 percent in 2008 and 2009, respectively.

By Oct. 2008, when it was clear markets were crashing beyond belief, the bank changed its tune. The economy was slowing down considerably, but likely would not shrink. 2008 would see between 0.0 to 0.3 percent growth, and 2009 between -0.2 to 1.1 percent. Wrong again.

In Jan. 2009, it was clear as day the economy had crashed, the Fed finally thought a recession would happen, but would be mild, projecting a contraction between -1.3 to -0.5 percent that year. Wrong again. Again, in 2009, it went down -3.1 percent.

Similarly, the Fed’s track record in projecting a recovery has  proven to be way off. That year, the Fed projected a V-shaped recovery after 2009. The economy would grow between 2.5 and 3.3 percent in 2010, and between 3.8 and 5.0 percent in 2011.

By Jan. 2010, the Fed had changed its expectations slightly for 2010 — by raising them. Then, they said the economy would grow between 2.8 and 3.5 percent in 2010, although they lowered their expectations for 2011 to between 3.4 and 4.5 percent.

Instead the economy only grew by 2.4 percent in 2010, and by 1.8 percent in 2011. Wrong again.

Even as late as June 2011, the Fed was projecting between 2.7 and 2.9 percent growth for 2011. Way off. Again, the economy only grew by 1.8 percent in 2011.

In Jan. 2012, the Fed said the economy would grow between 2.2 and 2.7 percent — just barely meeting its forecast that time when it came in at 2.2. percent for the year. But, hey, eventually a broken clock will be right.

Now, 2013 looks to be another disappointing year. If GDP comes in at 1 percent annualized for the second quarter — as JP Morgan suspects it will — for the Fed to make its 2.3 percent target for the year the economy will need to average 3.2 percent growth in the third and fourth quarters. Good luck with that.

All of which might explain why Fed chairman Ben Bernanke has had to walk back — or is it moonwalk? — his talk of tapering quantitative easing as soon as 2014.

If nothing else, it could reignite a famous dance craze from the 1980s.

Bill Wilson is a member of the board of directors of Americans for Limited Government.

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