Chairman Ben S. Bernanke and his Federal Reserve colleagues are preparing to meet next week as two-year Treasury yields at a record low signal a U.S. economy on the knife’s edge between growth and contraction.
Guiding their assessment of the outlook for the world’s largest economy will be forecasts contained in the so-called Teal Book, a confidential staff report with a blue-green cover. Policy makers’ confidence in those forecasts may be tempered as the course of the expansion has confounded their expectations.
Of 12 Fed staff forecasts since the beginning of 2010, seven have been downward revisions to the near-term outlook, according to minutes of Federal Open Market Committee meetings. This year, the outlook was raised in January and lowered three times since as a stream of data on weakness in employment and consumer spending signaled threats to a recovery from the deepest recession since the Great Depression.
In testimony to Congress last month, Bernanke signaled the central bank has more tools for easing should the economy weaken. “We have to keep all the options on the table,” he said.
That testimony was followed by reports on industrial production, consumer spending and employment that were weaker than predicted by economists. The data have also called into question the forecast of Fed governors for a pickup in growth in the second half of 2011. Central bankers estimated in June the economy would grow 2.7 percent to 2.9 percent this year and that the unemployment rate would move down to 8.6 to 8.9 percent in the fourth quarter. The rate stood at 9.2 percent in June.
Fed staff forecasters have been thrown off by unforeseen shocks that have rammed the economy, such as the threat of a European default in April 2010 and higher oil prices this April. Alongside such one-time events are more lasting changes in the way U.S. consumers and companies behave that Fed officials are still trying to comprehend.
“Something new and different is going on,” said Allen Sinai, chief global economist at Decision Economics Inc. in New York. “Neither monetary nor fiscal policy is giving us the kind of bang we have traditionally got. The household sector is simply not spending as it has in the past.”
Fed staff are also reviewing production schedules and contacting auto companies to gauge how the resolution of supply chain disruptions following the Japanese earthquake and tsunami in March may lead to higher production of cars and trucks.
That could provide a boost to GDP in the second half. Yet without follow-on purchases, the cycle of investment spending and hiring won’t engage. Consumer spending, which decelerated to a 0.1 annual rate in the second quarter from 2.1 percent the previous three months, signals trouble on that front.