Magazine article Economic Trends

The Economy in Perspective

Magazine article Economic Trends

The Economy in Perspective

Article excerpt

Caveat forecaster ... The most remarkable aspect of current economic conditions is that they are so unremarkable. Real GDP expanded at a 3.7 percent rate during the last four quarters, the unemployment rate stands at 5.2 percent, and core CPI inflation registered 2.2 percent during the last 12 months. In other words, the economy is expanding somewhat faster than its long-term average, unemployment is at its long-term average, and the inflation rate is low and stable. Many forecasters expect real GDP to expand at a slightly slower rate in 2005 than in 2004, but still at a solid pace. Inflation is also thought to be well anchored although inflation measures were slightly elevated during the past year.

Most analysts' relatively sanguine picture of 2005 does not necessarily mean that it will turn out to be a ho-hum year. First, any forecast is just that, a forecast subject to various risk factors. Some, like energy prices, seem obvious. Others, like the pace of productivity growth, are more subtle, if productivity growth slows significantly from its pace of the last decade, might pressure on wages and inflation going forward be stronger than what is built into the average forecast? What about household consumption? If consumers decide to increase their personal saving rotes after a long period of decline, might that not come at the expense of some of the consumption spending already built into the projections? Professional forecasters, who know more about these risks than the public does, use projections to evaluate exposure to various possible scenarios--they do not simply plan for the most likely one.

Another reason to be skeptical about forecasts for 2005 is that economists have more talent for describing the future than putting a date on it. The U.S. current account deficit and the dollar provide a good example: Several years ago, a number of economists pointed out that if our current account continued on its (then) present course, one might reasonably expect the U.S. dollar to depreciate against its trading partners' currencies. The logic of this prediction rested on the much-quoted observation that unsustainable events have a way of stopping. If the current account deficit ever stopped growing in proportion to our GDP, economic theory and historical precedent suggested that dollar depreciation would probably be part of the adjustment process. …

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