Magazine article Economic Trends

The Economy in Perspective

Magazine article Economic Trends

The Economy in Perspective

Article excerpt

For reasons that have never been clear, economists are invariably asked to give outlook talks at the beginning of each year, as if a) that is the only time they actually think about the next 12 months, or b) that is the only time their audience pays attention. Neither of these explanations seems plausible. Perhaps the human mind has a compelling desire to organize and store information in compartments: Just file the economic outlook for 2006 in the appropriate folder and get on with making dinner.

The Federal Reserve Board's research staff has an excellent forecasting record (as such records go), and at this Bank we pay close attention to that and other forecasts. Like any business, we want to know what other people think about the things we spend so much time thinking about ourselves. That said, we like to believe that we are discriminating forecast consumers. We won't name names, but we do have our favorites. We are drawn to what might be called "the thinking man's forecaster"; not the one who tries to grab our attention with outrageous predictions of a depression or double-digit interest rates, but the one who tries to tell a comprehensive stow about how our world is adjusting to the laws of economics and the forces of history.

History suggests that international economic conditions will play a major part in the evolution of the U.S. economy. First, developing economies account for increasing shares of global trade. These countries are likely to become still more important to the United States as trading partners and, in addition, as targets of U.S. direct investment destined to act as a base from which U.S. companies will serve these countries' growing internal markets. There are indirect effects as well. China, for example, has become important not only to the United States but also to Japan, Korea, and many other Asian countries. Strengthening ties within that region could affect ties between Asia and the West.

Second, capital flows from the rest of the world into the United States have become substantial and probably played an important role last year in sustaining sales in the interest-sensitive sectors of the U.S. economy. Many Asian nations now save more than they invest, but the gaps could close over time as their living standards rise and people choose to consume more than they do today. …

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