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Five Years Later ...

Economy's better, but headwinds ahead.

12:00 AM, Mar 8, 2014 • By IRWIN M. STELZER
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That uncertainty has not deterred key forecasters from treating recent slow growth—an annual rate of about two percent—as the new normal, rather than as a temporary bump on the road to more rapid recovery. Larry Summers, the president’s first choice to replace Fed chairman Ben Bernanke, but shot down by the left of his party, muses that we may be entering an era of secular stagnation, a word once used to describe a no-growth economy in which demand is too weak to stimulate growth, but abandoned when the post-WW II economic proved to be far from stagnant. And Larry Lindsey, at one time as great a favorite of Republican president George W. Bush as Summers is a favorite of Democrat Barack Obama, suggests that every growth spurt will eventually be followed by below-average growth, producing a flaccid long-term average growth rate of a mere 2 percent. Top that off with a prediction by the nonpartisan Congressional Budget Office that in a few years “economic growth will diminish to a pace that is well below the average seen over the last several decades” and you have a non-partisan bit of angst added to those of a well-regarded Democrat, Summers, and an equally well regarded Republican, Lindsey.

Nevertheless, forecasting being a game in which the goal is less to get it right than to get one’s revisions in before the next guy, attention must be paid to recent contradictory data. The Institute of Supply Management says its index of factory activity rose in February after a January dip. January growth in durable goods orders and shipments “was better than expected,” according to Goldman Sachs, which also says new home sales “unexpectedly rose” in January, and that manufacturing activity in the Chicago area “was higher than expected” in February, proving that even the near-term expectations of economists can miss the mark. The Fed’s survey of the twelve Federal Reserve districts turned up eight reporting “modest to moderate” improvements in economic activity, two with no change, and only two, snow-stricken New York and Philadelphia, reporting a decline.

The Fed’s monetary policy committee will meet in ten days to try to make sense of these cross-currents. It will undoubtedly give heavy weight to Friday’s report that non-farm payrolls increased by 175,000 last month, well above the 84,000 and 129,000 recorded in December 2013 and January, respectively. The Fed, chairman Janet Yellen told the Senate, “is trying to get a firmer handle on exactly how much of that soft data can be explained by weather, and what portion, if any, is due to a softer outlook.” My guess is that she will conclude that when winter comes, spring cannot be far behind, and continue to reduce monetary stimulus in anticipation of increased activity in the next several months.

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