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Authors for macroblog are Dave Altig, John Robertson, and other Atlanta Fed economists and researchers.

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January 02, 2007

Forecasting Season

Barry Ritholtz catches the general theme of the latest Economic Forecasting Survey from the Wall Street Journal (page A1 in the print edition):

Economy Poised For '07 Rebound,Forecasters Say

Weakness in Housing, Manufacturing Is Likely To Take a Lighter Toll

That doesn't mean exactly mean a gangbuster year: The average GDP forecast for the first half of the year is just 2.3 percent -- though the median forecast was higher and not a single one of the 60 respondents was willing to predict negative growth over the first two quarters.
Other than a few economists, the overwhelming consensus view is for a soft landing and GDP growth of 2.5% to 3.0% in 2007.
... in a post that included this bit from Reuters (emphasis added):

The Economic Cycle Research Institute, an independent forecasting group, said its Weekly Leading Index slipped to 138.5 in the week ending Dec. 22 from 139.7 in the prior week, due to higher interest rates and more jobless claims.

However, annualized growth in the week ended Dec. 22 rose to 3.8 percent from 3.4 percent in the prior period, a reading not reached since last February.

"Given the steady improvement in the WLI, recession is no longer a serious concern," said Lakshman Achuthan, managing director at ECRI.

Ten-year Treasuries and mortgage rates have not gone through the roof. As a result, housing is going to be OK -- and a thousand doomsday forecasts must be put aside.
Nearly alone on the other side of the fence, Nouriel Roubini claims, in a post reviewing his not-too-bad 2006 predictions, that he has not given up on expecting the worst:
... the next few months will show whether my mid-2006 forecast of a US hard landing in 2007 will be proven true or not. Certainly some of my more recent forecasts for financial markets (equities fall, fixed income rally), about Fed easing in 2007, lack of real economy decoupling in the rest of the world are highly conditional on this US hard landing call. I am still of the view that the risks of a hard landing are high.
Indeed, the forecasters in the Journal survey do see some Fed easing in the cards:
The economists surveyed expect year-to-year inflation to decline to 1.7% in May from 2.0% in November. As a result, they expect the Fed to shift its focus from fighting inflation to helping the economy grow, lowering short-term interest rates to 4.75% by the end of 2007 from the current 5.25%.
Though Tim Iacono disagrees and James Hamilton is not so sure, neither of them is looking for a Fed rate hike.  Not so in Europe, at least according to The Skeptical Speculator:
It looks like the Bank of England may not be done with interest rate hikes. Not with the continued house price increases reported by Reuters...
And there could be more rate hikes from the European Central Bank as well. Reuters reports:

The case for more euro zone rate hikes got a boost from stronger than expected November money supply data on Friday and from comments on Thursday by ECB Governing Council member Yves Mersch, who said rates remain low in historical terms...

At Eurozone Watch, Daniela Schwarzer and Sebastian Dullien concur:

Is the ECB going to raise interest rates towards 4 percent?

Yes. The strong growth outlook will push the ECB to raise its interest rates to 3.75 percent in the first half of the year and by a further 25 basis points later on. As inflationary pressure is still limited, the ECB will refrain from tightening much faster. Risks to this call are, however, a stronger than expected US downturn or a strong appreciation of the euro. In these cases, the ECB might delay a further hike beyond 3.75 percent.

They also predict:

The euro will most likely further gain in value. There is a significant risk that it rises above 1.40 $ in 2007. Two factors are supporting the young currency: With further interest rate hikes by the ECB, investment in the Eurozone will become more attractive. Moreover, the possibility of a rate cut by the US Federal reserve still remains. Finally, there is a risk that central banks in Asia and from OPEC countries continue to diversify their portfolios and buy euros.

For their part, the consensus among WSJ group is that the dollar will stabilize near 1.3 per euro, about where it is today (though Claus Vistesen thinks there has already been enough appreciation and monetary policy to make a "dent" in eurozone growth).

Now we'll all wait and see how it is we will be wrong.

UPDATE: Cotango is going to "hold to my view that 2007 is going to be a rough year for the US economy: 1.5 % GDP growth" and beleives that "If it does get rough, the Fed will have to open the liquidity valves full blast".  David K. Smith reports on forecasts for the UK (where projected growth is close, but still higher, than expectations for the US).

January 2, 2007 in Europe , Exchange Rates and the Dollar , Federal Reserve and Monetary Policy , This, That, and the Other | Permalink


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"Now we'll all wait and see how it is we will be wrong."

Excellent, David! Bravo.

Here's how it is we could be wrong: with long-term rates lower (4.75%) than nominal GDP growth (5.50%), MEW rebounds, sending GDP north of 3.25%. Meanwhile, elevated resource utilization and the sliding dollar make the CPI creep up further. Et voilà! FFR @ 6% (not a forecast, just a -scary- scenario).

Posted by: Raphael Kahan | January 03, 2007 at 04:42 AM

Another thought: forecasters don't seem to think the wealth effect from surging equity prices will be important. They might be wrong. People don't own as much stocks as they own house equity, but the 20% or so increase in the indexes this year is a lot more than the 12% or so housing did last year.

Posted by: Raphael Kahan | January 03, 2007 at 10:50 AM

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