Ordinarily, four times a year, the Federal Reserve releases a document called the Summary of Economic Projections, or the SEP. This document lays out Fed policy-makers’ expectations about growth, inflation, unemployment, and short-term interest rates. These projections help market participants anticipate what actions the Fed might take in the future and why — for example, if Fed policy-makers are worried about rising inflation, you might expect them to be more eager to raise interest rates.
So at Fed chairman Jerome Powell’s press conference this Sunday announcing emergency moves, including a one-percentage-point interest-rate cut, New York Times reporter Jeanna Smialek had a question: Where’s the SEP? It was supposed to come out this week, at the regularly scheduled meeting of the Federal Open Market Committee. But that meeting has been canceled in favor of Sunday’s emergency meeting.
Powell’s response was that there is no SEP this quarter because, essentially, there is no point in making economic forecasts right now.
“The economic outlook is evolving on a daily basis,” he said. “And it really is depending heavily on the spread of the virus, and the measures taken to affect it, and how long that goes on. And that’s just not something that’s knowable. So, actually writing down a forecast in that circumstance didn’t seem to be useful. And in fact, it could have been more of an obstacle to clear communication than a help.”
Powell did say he expects to release a SEP in June, but he and his colleagues at the Fed are not the only ones begging off economic forecasting for now. Increasingly, companies are unwilling to forecast even their own financial performance, let alone the performance of the broader economy.
Last Tuesday, Hilton Worldwide and American Airlines withdrew not just their estimates of earnings for the whole of 2020 but for the current quarter, which will end on March 31. JetBlue Airways and Booking Holdings made the same move last Monday. This is remarkable: 69 or 70 days into a 91-day quarter, these companies were not in a position to estimate how much profit they would make in the entire quarter. This is because, as Powell says, the economic outlook is evolving on a daily basis. January looked good for lots of companies in the travel industry, and much of February held up fine, but business fell off a cliff in early March, and the last two weeks of March are too unpredictable to forecast. And the rest of the year — who would claim to know when this thing is going to get better?
Other people who have been willing to make and revise economic forecasts probably should have thrown up their hands. Goldman Sachs issued a research note to clients on Sunday afternoon, revising downward the bank’s forecast for U.S. economic growth. Goldman now expects the U.S. economy to grow just 0.4 percent this year, shrinking at a 5 percent annualized rate in the second (spring) quarter, and then rebounding strongly in the third and fourth quarters after the epidemic abates. This forecast supersedes a forecast issued just one week earlier, when Goldman expected zero growth in the second quarter and 1.2 percent for the whole year. A lot changed in a week: As Goldman notes, “The uncertainty around all of these numbers is much greater than normal.”
On Tuesday, The Wall Street Journal’s Real Time Economics newsletter gathered up nine revised forecasts for the second quarter, and Goldman’s minus-five was somewhere in the middle of a very wide range: grimmer than Wells Fargo’s expectation of a -3 percent growth rate, but not nearly as bad as Berenberg’s expectation that the U.S. economy would shrink at an 11.7 percent pace.
Personally, I find the revised Goldman forecast to be excessively optimistic. Goldman’s forecast entails — at the very peak of the outbreak — only a 65 percent reduction in spending at casinos, and only a 50 percent reduction in spending on food service, hotels, and car rentals. Those are Goldman’s figures for the very moment when we are hit worst nationally, which means the bank expects significantly less disruption than that at most times over the next few months. Goldman also assumes economic disruptions related to the virus will peak in April, with economic activity beginning to rise again after that.
Consider what we have seen just on Sunday evening and Monday, following Goldman’s issuance of this note at 3 p.m. on Sunday afternoon. The Dow Jones Industrial Average fell about 3,000 points, though as of Monday evening it looks set to rebound somewhat on Tuesday. Casinos aren’t just empty — they’re closing, sometimes at the initiative of their owners and sometimes by order of the government. Airlines are announcing even more service contractions and asking the government for a bailout. Cities and states are ordering the closure of bars and dine-in restaurants. Six counties in the San Francisco Bay Area have gone farther, ordering their residents not to leave home at all except under specific circumstances. And President Trump said at a press conference that it was likely major social disruptions aimed at stopping the spread of the novel coronavirus would persist into July or August. Does it really seem like a good idea to assume this whole mess will peak in April with the hospitality sector running at half steam at the low point? I certainly don’t think so.
You may be surprised to hear some economic observers saying a recession is now anything other than a certainty. But CNBC’s periodic survey of Federal Reserve watchers, released Monday, found only 67 percent of respondents expecting a recession in the next 12 months. CNBC’s Carl Quintanilla asked the network’s economics reporter, Steve Liesman, what the other 33 percent could possibly be expecting, and Liesman said they essentially expect a near miss: Any momentary contraction of the economy doesn’t count as a recession, as defined by the business cycle dating committee of the National Bureau of Economic Research; rather, a recession must entail a “significant decline” in economic activity. A track like the one in Goldman’s forecast, where the economy contracts only in one quarter and then rebounds sharply, might not officially count as a recession, though Goldman’s economists say it “probably” would. In any case, the message is clear: If we somehow avoid a recession, we will have gotten damned close to one.
I wrote a few days ago on the extreme uncertainty about how bad the coronavirus situation will get. The grimmest epidemiological outcomes carry grim economic consequences with them. But there are also outcomes that are not so grim from a public-health perspective but still entail very serious economic damage. Closing most of the nation’s restaurants and bars for a month or more, effectively shutting down air travel, telling people to stay home from school and work — these measures are likely to save a lot of lives, and I support them, but they are also sure to lead to layoffs, bankruptcies, and permanent business closures. Well-designed fiscal policy can mitigate this economic damage, but can’t eliminate it, and I’m never confident our fiscal policy will be as well-designed as it should be.
Accurate economic forecasts would help a lot with that fiscal policy-making. As lawmakers float their proposals to prop up the economy (like Senator Mitt Romney’s idea to send every American adult $1,000), it sure would be nice to know how much the economy would be set to shrink without fiscal support. It’s not the forecasters’ fault that they can’t produce reliable numbers in this time of great uncertainty. As such, the best course of action for policy-makers is to throw some money out the window, and then throw more money out later if it continues to be necessary. With interest rates on government bonds incredibly low, the cost of stimulating too much is limited, but the cost of stimulating too little could be severe.
We’re committed to keeping our readers informed.
We’ve removed our paywall from essential coronavirus news stories. Become a subscriber to support our journalists. Subscribe now.