NEW YORK – Economic data has been better than forecast in October, significant, since the economy had been performing worse than expected for most of the year, and these perceptions often become a self-fulfilling prophecy, according to Federal Reserve Bank of Atlanta President and Chief Executive Officer Dennis P. Lockhart.
Most indicators in the first quarter were worse than expected, Lockhart told the CFA Society of East Tennessee late Tuesday, according to prepared remarks released by the Fed. Even in the second quarter, data still surprised to the downside of already weak projections. “As the summer progressed, the data surprises were unrelenting and on the negative side of expectations,” he said.
When the August FOMC meeting was held, he said, “it was clear to my Atlanta Fed colleagues and me that we had to rethink our position. The momentum of the economy looked a lot weaker than was our assessment earlier in the summer.”
Data showed “the weak first quarter was one of a succession of progressively slowing quarters and not merely the result of one-time events,” with the weakness “more broad-based than earlier price and disaster shocks could account for.”
And confidence took hits from “the debt-ceiling battle, the S&P downgrade of the U.S. credit rating, Hurricane Irene and the storm damage on the East Coast, stock market volatility, and an initial report of zero job growth in August,” Lockhart said. “And very prominently, the European debt crisis seemed to worsen, which again raised the possibility of spillover into the U.S. financial system and economy. All this worked to change views about the underlying fundamentals of the U.S. and global economies. As a consequence, growth estimates for the second half of the year and into 2012 were marked down substantially by most forecasters.”
Since late August data have surprised to the upside of low expectations. “For the third quarter at least, it appears that downgrades of growth forecasts have been too pessimistic,” Lockhart said.
“Admittedly, the economic environment today is characterized by heightened uncertainty,” he added. “That uncertainty itself can act like a negative shock to the economy if investment and consumption decisions come to be driven by worst-case scenarios of extremely sluggish growth, at best, with a very good chance of sliding back into recession.”
But Lockhart said a “worst-case scenario is less likely than it appeared to be a couple of months ago.” He ruled out a double-dip recession, “at least in the absence of a significant negative shock.”
In fact, Lockhart said he sees “a gradually improving economy, and I think this point needs to be recognized.”
However, downside risk remain, especially “financial instability from developments in Europe and further loss of confidence if the so-called congressional ‘supercommittee’ here in the United States fails to reach agreement—that is, if the supercommittee is unable to arrive at a credible and sufficient fiscal rebalancing plan, leaving the fallback to mandatory cuts as the only resort.”
But the expected 2.5% growth in 2012, while an improvement over this year, offers little hope of much progress “in absorbing slack in the economy—above all, labor market slack.”
If Europe stabilizes and a resolution takes shape, “and if the supercommittee delivers a believable fiscal plan accepted by Congress, these two developments would go a long way toward clearing the air and energizing economic activity,” he said.
