Money Sage (archive)

In working to form a judgment as to the probable extent, severity, and duration of the unfolding economic downturn, we consider a number of factors. There is one factor which serves as a confirmatory element in our assessment. This is the forecast of individual FED regional bank presidents and individual FED governors. These forecasts are, in a way, far more useful than the official FED pronunciamentos.

These latter are a group product, negotiated to take due account of a variety of viewpoints and different perceptions, and melded into a useless composite. Moreover, as we have noted in an earlier post, a well-known economist has compared the actual FOMC (Federal Open Market Committee) transcripts -- which faithfully record the verbatim proceedings of the FOMC meetings -- and the minutes, which are released shortly after the meetings. This economist -- a careful and reliable professional, we judge -- discovered that frequently the transcripts did not bear the remotest resemblance to the minutes. We leave it to you, dear reader, to figure out this, shall we say, "conundrum"?

In the public statements, speeches, and interviews which individual FED policymakers present frequently to selected audiences and to the media, there is a far more straightforward tone. Each individual tends to present his real viewpoint and assessment. What we have found most useful is the application of the technique which we learned when we were equity analysts, viz., to compare projections and expectations of corporate executives with whom we spoke regularly with what subsequently transpired. Through this method, we were able to gain a sense of the reliability of the contact.

This morning, Mr. Fisher, who is the President of the Federal Reserve Bank of Dallas, said publicly that we could expect two quarters of economic weakness, followed by recovery. Mr. Fisher expressed his belief that a longer period of "negative growth" was unlikely. These remarks followed, by several days, those of Mr. Poole, the President of the Federal Reserve Bank of St. Louis, and of Mr. Plosser, the President of the Federal Reserve Bank of Philadelphia. Both gentlemen were similarly upbeat in their assessment, with Mr. Poole stating flatly that we would avert a recession, even in the first half.

Since these three regional bank presidents are well know for their adamant opposition to taking easing measures out of concern that the inflationary consequences would outweigh any questionable short-term gain for the economy, their comments need to be considered in this light. That the three agreed that we are very close to recession is significant, we think. This is about as bearish about the economy as they can permit themselves to be while still maintaining a negative stance toward monetary easing.

More significant, we think, is the forecasting record of said gentlemen. They have been CONSISTENTLY WRONG since long before the initial eruption of the sub-prime crisis last summer. The economy has proven to be much, much weaker than they had prophesied. Their relatively sunny analyses, consequently, carry no weight with us; indeed, they suggest strongly that a serious and prolonged economic downturn is more likely than not. In short, they add some weight to a bearish forecast for the economy. They remain, we think, pretty reliable CONTRARY INDICATORS.

Moneysage 2008 ©