From a small northwestern observatory…

Finance and economics generally focused on real estate

Posts Tagged ‘Council of Economic Advisors

The FED — “Everything Old is New Again”

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Even though we’re both South Carolinians, I didn’t meet former FED Chair Ben Bernanke until 2004, when we were introduced at the American Economic Association’s annual FED luncheon in San Diego.  He was, at the time, a member of the FED Board of Governors, a seat he would soon resign to become the Chair of President W’s Council of Economic Advisors, and shortly thereafter the FED Chair, succeeding the long-serving Alan Greenspan.

So now, somewhat in contrast, we have  Jerome Powell nominated to be the new FED Chair.  Like Bernanke, Powell will come to the job having served as a FED Governor.  He also served in government, as Treasury Undersecretary, but spent most of his career in the private sector, most recently, intriguingly, at the Global Environment Fund, focused on specialty finance and opportunistic investments.  After several years of Yellen and Bernanke, we tend to forget that many prior FED chairs came with significant private sector experience.  Greenspan spent nearly his entire career on Wall Street, interrupted by a stint as President Ford’s Council of Economic Advisors Chair.  Paul Volker before him had two long stints at Chase Bank, interrupted by a brief period in the Kennedy Administration as an Undersecretary of the Treasury.   William Martin worked as a stockbroker at A.G. Edwards, Thomas McCabe was the CEO of Scott Paper, and William Miller was CEO of Textron.

Powell will be the 9th FED Chair since WW II, and most intriguingly, one without a degree in economics or finance.  Yellen, Bernanke, Greenspan, and Burns all had doctorates, so we tend to think that’s de rigueur.  Actually, it would appear that holding a Ph.D. in economics isn’t a prerequisite at all, and in fact of all of the FED Chairs in history, only those 4 held doctorates.  McCabe, the first FED Chair after WW II, held an BA in economics.  Martin, who succeeded him, studied Latin, originally considering a career as a Presbyterian minister.  (Originally appointed by Truman in 1951, Martin served as FED Chair under 5 presidents, leaving office in 1970.)  Miller, who served under Carter, was also a lawyer (and before that a Coast Guard officer) before joining Textron.  The great Marriner Eccles, who served as Chair for 14 years under Roosevelt and Truman, had an undergrad degree and came out of his family’s business in Utah.  (Intriguingly, this FED Chair who helped define Roosevelt’s New Deal was a registered republican.  Go figure…)

So, why the history lesson?  In part, to reflect on the fact that Powell may be one of the most mainstream appointments this White House has made.  While FED chairs tend to have an agenda, the job tends to be somewhat more reactive than proactive.  Consider the storm that Bernanke waded into, or the aftermath which Yellen has had to manage.  Powell’s job will be to stay the course, which has been quite good the past few years.  One tends to feel a bit sorry for him, recognizing that his will probably be an unenviably tough term of office.

(Footnote — Many will disagree with my comment about doctorates, and argue that Paul Volker had one.  He did not.  Volker held an MA in political economy from Harvard, and went on to do advanced graduate work in the subject at the London School but without the award of a degree, not that it appears to have held him back…)

 

Dreams of GDP growth

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Paul Krugman and I don’t necessarily agree on everything, either in politics or economics, but I respect his research (and yes, envy his Nobel Prize).  That said, he has an insightful piece on his blog about The Donald’s economic projections, which both Paul and I find probably untenable.  I encourage you to read it here.

In short, The Donald projects 3% to 3.5% GDP growth throughout his tenure in the White House.  Under Reagan, it was at the lower end of this scale, and under Clinton it hit 3.7%.  Remember that both of those presidents inherited crappy economies, and so  a pendulum bounce in GDP would have been expected.  The Donald is inheriting a healthy overall economy (admittedly, with pockets of problems).  As such, growth in the 2+% range is more likely. So why are they projecting such glossy numbers?  In short, they back into what they need to say in order to fit their rosy projections.

I would note that the Chair of the Council of Economic Advisors sits vacant as of this writing, with no nominee in the offing.  This Council serves the president, among other ways, by putting a reasonableness test on just such projections.  Truly excellent economists have served on this Council thru the years, from all sides of the economic spectrum (and yes, there are more than two).  In the absence of trained, academic economists in this role, these projections are left up to whim.

Unlike Paul K, I have some hope that Paul Ryan may be a voice of sanity here.  He seems to understand that balance sheets need to balance.  Let’s see how that works out.

Written by johnkilpatrick

February 21, 2017 at 12:00 pm

Livingston Survey

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I’ve noted in the past that one of my favorite economic forecasts comes from the Philadelphia FED.  The semi-annual Livingston Survey captures the sentiments of 28 leading economic forecasters on key metrics, such as unemployment, GDP growth, and inflation.  Year after year, the forecast remains fairly accurate and steady — much to the disappointment of politicians who fail to realize that the worlds largest non-centrally-planned economy changes course fairly slowly.

Of course, 2017 may be a bit of an exception.  Indeed, so was 2009.  The forecast can’t take into account shocks to the system (such as the recent economic melt-down) nor can it handle significant policy shifts from D.C.  I have some “gut” feelings that differ a bit from the Livingston folks, and I’ll note those at the end.

Now, on to the details.  GDP growth for the second half of 2016 was a bit better than had been previously forecast, coming in at about 2.7% rather than the previously forecast 2.4%.  Looking forward, the forecasters project a 2.2% annualized growth in the economy during the first half of the coming year, rising slightly to 2.4% in the second half of 2017.

Ironically, unemployment appears to be coming in slightly higher than forecasted, about 4.9% rather than the previously projected 4.7%.  Of course, neither of these numbers is anything to complain about.  Forecasters look to continued improvement in the unemployment numbers through the coming year, ending up around 4.6% next December.

Inflation measured by the consumer price index (CPI) is right on target at 1.3%.  Next year, forecasters are projecting 2.4% (slightly up from previous 2017 forecasts) and the crystal balls (which is all they are this far out) suggest 2.5% in 2018.  The yield curve is ending the year a bit steeper than previously projected.  Earlier forecasts put the short end (3-month T-Bill) at 0.75% and the long end (10-year) at 2.25%.  Currently, they see the year ending at 0.55% and 2.3% respectively.  For 2017, the soothsayers forecast a year-end 1.12% at the short end and 2.75% at the high.  This is somewhat higher at the high end and lower at the near end than had been projected previously, suggesting an expectation of higher overall interest rates in the future.  Finally, forecasters see the stock market rising over the next two years, but at a fairly lackluster rate.

I promised my own bit of forecasting.  During the tumultuous months surrounding the recent melt-down, I played a bit of follow-the-leader with this survey, and went on record that the melt-down would be short-lived.  Boy was I wrong!  As noted, this survey is pretty good when the economic ship is on a steady course, but doesn’t handle rough water very well.  For the past several years, we’ve had an unprecedented period of economic growth, by all metrics (GDP, stock prices, unemployment, and inflation).  Just from a pure market-cycle perspective, we may be overdue for some unpleasantries.  Looking at the political horizon, I’ve already noted that politicians are generally disappointed that the economy doesn’t move as quickly as they wish or even in the desired directly.  That said, we have a Congress that is frothing to trim the Federal budget, and will probably opt to do so in the transfer payments arena (welfare, health care subsidies, etc.).  They’ll hope to balance this with tax cuts.  However, tax cuts fall slowly, and on one sector of the economy, while entitlement cuts (and any budget cuts, for that matter) happen quickly and are usually borne by a different segment of the economy.   I think I’ll be watching GDP reports fairly closely for the next couple of years.  I would note what happened in the years leading up to the 1982 recession — not withstanding inflation (driving nominal interest rates), the economy looked OK in 1981, and the metrics were generally pointed in the right direction.  (For a good visual representation, I’d refer you to the August, 1981, report to Congress of the Council of Economic Advisors, a copy of which you can view on the St. Louis FED’s website by clicking here.)

All in all, we’ve been focused on politics for the past several months, and now we’re going to find if those political decisions have actual economic repercussions.  Stay tuned!