If an unexpected tree is expected to fall in the forest and does, does it make an unexpected sound?
The U.S. growth outlook has darkened significantly in the latest Reuters poll, even though the Federal Reserve is unanimously expected to embark on a fresh round of asset purchases to prop up the economy.
Economists have chopped their outlook for gross domestic product (GDP) through to the third quarter of 2011, with no prospect of an interest rate hike until the end of next year. …
The median forecast in the survey of more than 70 economists, taken over the past week, put U.S. GDP at 2.0 percent annualized in the fourth quarter, down from 2.1 percent expected last month and 2.7 percent expected in the July poll.
Growth is expected to pick up to 2.2 percent in the first quarter of 2011, but that is 0.3 percentage points slower than the median from last month’s poll.
The consensus for the second and third quarters of 2011 of 2.5 percent and 2.8 percent were each chopped by 0.2 percentage points in the past month.
This makes the prior gloomy estimate look cheery by comparison. If we are growing at only 2.6% in 2011Q3, we will have even higher unemployment than our current stagnation at historic high levels. The overall predicted growth in 2011 looks pretty close to 2.4%, perhaps just a little lower — which will make all of 2011 look like the second quarter of this year.
The second round of quantitative easing (QE2) will put more cash into the economy, but it’s hard to see how that will do much other than maintain the status quo. Interest rates are already at historic lows. The problem isn’t credit or cash; it’s market uncertainty, and that is not coming from the Fed. It’s coming from the White House and Congress, which have so far run away from the issue of the scheduled across-the-board tax hikes, and also have introduced so much regulatory uncertainty that no one knows what it will cost to maintain the status quo on labor and health care in 2011, let alone how much money expansion will require.
It’s telling that these predictions are based on assumptions of getting the QE2 and that interest rates will remain at current levels. Assuming that the economy remains as flat as predicted with these assumptions, will Reuters continue to write about how low-growth economic indicators arrive unexpectedly?
The more substantive question, though, will be what happens after another year of no growth and high unemployment. Will voters punish the White House in the 2012 election cycle if stagnation continues into the primaries? And with Democrats defending a lot more Senate seats than Republicans in 2012, will the 2012 cycle be just a continuing echo of the 2010 wave expected to crest in less than three weeks?
