Skip to main content
Federal Reserve Board Chairman Janet Yellen speaks during her monthly news conference at the Federal Reserve, September 17, 2014 in Washington, DC. (PAUL J. RICHARDS/AFP/Getty Images)

Fed's Gloomy Forecast

Irwin M. Stelzer

If you know how many months there are in a “considerable time,” you will know exactly when Janet Yellen and her colleagues on the Federal Reserve Board’s monetary policy committee plan to begin raising interest rates. If not, you can add your guess to those of professional Fed watchers who are predicting the date will fall somewhere between early 2015 to mid-2016.

In fact, the Fed’s adherence to its “considerable time” language is the least interesting news to come out of this week’s Fed meeting. More interesting is the central bank’s latest prediction. The Fed’s economists expect real GDP growth to total 2.1 percent this year, 2.8 percent next year, 2.75 percent in 2016, and 2.4 percent in 2017, before settling into a “longer run” rate of 2.15 percent.

Those growth rates are hardly high enough to set pulses pounding in anticipation, and are more likely to have set teeth gnashing in some policy circles in Washington, circles in which rapid growth is seen as a cure for a multitude of ills, ranging from a low labor-force participation rate to rising inequality. They represent a lowering of earlier forecasts, which proved excessively optimistic, and in my view ignore the growth prospects for major sectors of the economy. Consider, for example, the housing sector, which recorded a 14.4 percent decline in August. Home builders know that most of that fall was accounted for by the volatile multi-family sector, and that even the low August figure was up 8 percent above last year’s. So they remain cheerful.

The index of homebuilders’ sentiment rose this month to a level not seen since 2005. Goldman Sachs Kim Dawsey notes that Goldman has found the index “to be a decent leading indicator for housing starts….We expect a solid positive contribution to GDP growth from residential investment in Q3.” With reason. Americans overwhelmingly believe that a home is a good investment. But 53 percent think their income is too low, and 41 percent say their credit isn’t good enough to qualify for a mortgage. That might be changing. Pulte, a major builder, reports that sales of its lower-priced homes, in the $200,000 range, rose 29 percent and 26 percent in the first and second quarters, respectively, compared with last year.

At the high end of the market, Toll Brothers (average price of homes it recently delivered is $732,000) reports increases of 53 percent and 36 percent in revenues and number of homes sold, respectively, compared with its third quarter last year. And sales of previously owned homes, the bulk of the market, climbed steadily during the summer. Lawrence Yun, chief economist with the National Association of Realtors, says, “We are in a multi-year housing recovery.”

That is not to say all is clear sailing for this key industry. Interest rates are likely to rise; young people saddled with debts from student loans, and with incomes (adjusted for inflation) that remain 6 percent below 1989 levels, are lingering on their parents’ couches, rather than starting new households; shortages of skilled construction labor are holding back the industry’s growth; the slow pace of the recovery and continued uncertainty favor renting rather than buying. Despite such negatives, the overall outlook for the housing sector has to be considered sunny, with spotty clouds.

So, too, for the auto industry. Sales are booming, helped at the end of the current model year by traditional discounting. There is a reason that firms such as Mercedes are expanding their manufacturing facilities here. The average age of the 253 million cars and light trucks on our roads is 11.4 years. It should be no surprise that consumers find new cars — more fuel-efficient, more gadget-laden, safer — attractive. With their balance sheets in better shape than they have been for years, consumers are willing and able to borrow at the fastest pace in almost eight years in order to finance their new-car yen. The cloud on this horizon is Uber, which the industry fears young urbanites will find a substitute for car ownership.

Finally, there is the oil industry. The development of the technologies for fracking and for horizontal drilling have made America the world’s largest energy producer, and driven oil and gasoline prices down, with more price cuts likely. That’s the equivalent of a massive tax cut, freeing up hundreds of millions dollars of purchasing power for everything from new iPhones to cars and home improvements. Exports of oil products and, soon, natural gas, will cut into the trade deficit. And cheap natural gas is attracting foreign investment and creating jobs in America — not as many as advocates of “in-sourcing” claim, but a significant number.

To the outlook for these sectors add the facts that America remains the innovation capital of the world, that millions of the world’s rich and entrepreneurial say they plan to emigrate to America in the next five years, and that our corporations have been under-investing in hardware and software for years. If the increases in new orders and construction spending are any indication, they just might be getting ready to inject some of that cash into the economy.

Still, the gloomier Fed forecasts cannot be ignored.

  • Fear stalks Wall Street after attorney general Eric Holder’s announcement earlier this week that he might file criminal charges against bankers who, if found guilty, are “most likely going to prison.” As a result, banks, having already paid multi-billion dollar fines for improvident mortgage lending, just might choose to make only such inconsequential loosening of lending standards as needed for public relations and political purposes, aborting a nascent recovery at the entry-level end of the housing market.
  • The Fed’s intricate plan to ease us gradually into a higher-interest-rate era might not work, its failure causing a spike in interest rates that results in a huge increase in the cost of carrying our bloated national debt.
  • The inclination of workers in their prime working years to stay out of the labor market might prove irreversible, even if growth accelerates.
  • Our inability to solve the problem of rising inequality might suppress consumer spending and even threaten the continued acceptability of our version of free-market capitalism.
  • Then there are events, dear reader, events, to borrow from former British prime minister Harold Macmillan. Vladimir Putin, his appetite whetted by gorging on a piece of Georgia and a piece of Ukraine with no untoward consequences, might shatter world peace by biting off a piece of a NATO member. [With thanks to Mel Brooks’ description of Hitler wanting peace, “A little piece of Poland, a little piece of France,” etc.]. ISIS might …. well, you get the idea.

To each his own balancing of the plusses and minuses. My guess is that the Fed is excessively glum. Or setting targets it will win kudos for exceeding.

Related Articles

21st Century Fox, Time Warner Merger in the Works?

Robert M. McDowell

Former FCC commissioner Robert McDowell on potential deals at sun valley....

Watch Now

National Heartburn, Even With an Improving Economy

Irwin M. Stelzer

After celebrating our Declaration of Independence from the British oppressor, we will return to work Monday having consumed 155 million hot dogs and, ...

Continue Reading

Political Class Idle as Tax Inversions Continue

Irwin M. Stelzer

To meteorologists, an inversion is a deviation from the normal change of an atmospheric property. It can lead to pollution and adverse health effects....

Continue Reading