by Bill McBride on 1/14/2013 01:30:00 PM
Monday, January 14, 2013
From San Francisco Fed President John Williams: The Economy and Monetary Policy in Uncertain Times. On the economic outlook:
As far as my outlook is concerned, I expect the economic expansion to gain momentum over the next few years. When final numbers come in, I expect growth in real gross domestic product—the nation’s total output of goods and services—to register about 1¾ percent in 2012. My forecast calls for GDP growth to rise to about 2½ percent this year and a little under 3½ percent in 2014. That pace is sufficient to bring the unemployment rate down gradually over the next few years. Specifically, I anticipate that the unemployment rate will stay at or above 7 percent at least through the end of 2014. And I expect inflation to remain somewhat below the Fed’s 2 percent target for the next few years as labor costs and import prices remain subdued. My forecast takes into account both the fiscal cliff agreement and the various stimulus measures the Fed has put in place.And on uncertainty:
The economy has been growing in fits and starts for the past three-and-a-half years. Every time economic growth appears to be picking up steam, something happens that brings it back down again. Sometimes the barriers to growth are natural, like the tsunami of 2011, and the drought and Superstorm Sandy last year. Other times they are man-made, like the crisis in Europe and our own fiscal cliff drama. ...CR comment: I think the main reason businesses aren't investing more is lack of demand, as opposed to "uncertainty". But it doesn't help having these self-inflicted wounds.
But the direct hangover from the financial crisis is not the only reason for sluggish growth. Most banks and other financial institutions have largely returned to health, and many nonfinancial businesses have been piling up cash. Their balance sheets look exceptionally strong. For businesses that can get credit, interest rates have rarely, if ever, been lower. You would think this is a great time to expand your business. Yet, many businesspeople appear to be locked in a paralyzing state of anxiety. As one of my business contacts said recently, “They’re just not willing to stick their necks out.”
What’s going on? The terrifying financial crisis followed by a bumpy recovery, the crisis and recession in Europe, the budget mess in the United States, questions about taxes and health-care reform—these and other factors have combined to undermine the confidence of Americans and make them suspicious about the durability of the economic recovery. Indeed, an index of policy uncertainty developed by academic economists recently soared to the highest level recorded in over 25 years. In a pattern reminiscent of the debt ceiling debate in the summer of 2011, the recent rise in uncertainty has been accompanied by a sharp drop-off in business and consumer confidence.
Posted by Bill McBride on 1/14/2013 01:30:00 PM