Forecasting Difficulty

The Lehmann Letter (SM)

The Federal Reserve has the best economic and forecasting staff of any large organization. Nonetheless today's economy presents a challenge to the Fed.

Take a look at the following quotes from this article in today's New York Times:

http://www.nytimes.com/2012/03/12/business/as-fed-meeting-nears-it-awaits

“…The Fed is not sure how fast the economy is growing. Some of the main measures, which produce a murky picture in the best of times, are now telling divergent stories. In particular, people do not appear to be buying enough goods and services to sustain the rising pace of job creation.

“The Fed’s chairman, Ben S. Bernanke, testified before Congress last month that job growth would probably slow because the other measures tended to be more accurate. But he added that the reverse also could be true. And the Fed would like to know the answer before it decides whether it should promise new efforts to improve growth.

“…The Fed is already engaged in an immense campaign to improve growth, which it has said it plans to continue for the next three years. The central bank is holding short-term interest rates near zero, and it has amassed a $2.5 trillion portfolio of Treasury securities and mortgage-backed securities to pull down long-term rates. Any new program probably would amount to only a modest increase in the scale of the overall effort.”

When the Fed's chairman gives his best guess of the economy future but then says that the reverse could also be true, you know forecasting is difficult. That difficulty notwithstanding, the article also says that the Fed plans to maintain its economic stimulus for three more years. That's a good indication of the current economy's weak recovery.

This letter has long maintained that we can't have a robust economy without robust residential real estate. There doesn't seem to be any reason to change that view.

(To be fully informed visit http://www.beyourowneconomist.com/)

© 2012 Michael B. Lehmann