A scan of recent US GDP forecasts shows a sizeable gap between the Fed’s estimates and economists from the financial services sector.
This topic was taken up nicely today in Bloomberg’s piece “Time for Fed to accept that U.S. growth not what it used to be?” On one hand, the story reports that the Fed is expecting about 3 percent growth next year and 3.5 percent in 2015, largely on stronger employment numbers and other metrics. But others are not so convinced, calling for 2 percent growth next year and perhaps beyond that.
The story also points out that the Fed has consistently gotten it wrong, when its come to GDP forecasts in recent years. Heck, they called for 3.5- to 4.5 percent growth in 2012, when in fact it grew just 2 percent.
What is going on? Pretty simple actually. This is old fashioned Fed politics, even though the Fed is an apolitical branch of the government as we all know. At the end of the day, the massive QE program and the absence of a coordinated fiscal policy means that the rosy predictions simply won’t add up.
There are many other factors as well, one of which was pointed out in recent days in a New York Times post called “Three Questions on the Jobs Picture” which argues that the US is seeing a dramatic decline in its labor force.
So the issue may come down to this. The Fed can try all it wants to boost the US economy upward to 3 to 3.5 percent growth. But what happens if its directed at an economy that has a shrinking labor force? Welcome to the 2 percenters.