Great news, optimistic Fools. Someone's forecasting another 1990's-style boom right around the corner.
Sadly, this one has nothing to do with the next Google (NASDAQ:GOOG) or Microsoft (NASDAQ:MSFT). And the forecaster isn't exactly known as an oracle.
No, this is a GDP and inflation forecast, and the fearless analyst is the White House.
Curious numbers
On Thursday, the White House released the annual Economic Report of the President. It's almost 500 pages of numbers showing where we're at, where we'd like to go, and how we'll get there.
Buried in the middle is a table predicting growth and inflation over the next decade. For the four years starting 2011, here's what the White House says we're in for:
|
Year |
2011 |
2012 |
2013 |
2014 |
Average |
|---|---|---|---|---|---|
|
Real GDP Growth |
4.3% |
4.3% |
4.2% |
3.9% |
4.2% |
|
Inflation |
1.7% |
2.0% |
2.0% |
2.0% |
1.9% |
Source: Economic Report of the President.
Pretty sweet, eh? Huge GDP growth (the 100-year average is 3.3%) with barely a hint of inflation. That's about as good as it gets.
How good? Compare that forecast with what happened during the '90s dot-com economic explosion:
|
Year |
1996 |
1997 |
1998 |
1999 |
Average |
|---|---|---|---|---|---|
|
Real GDP Growth |
3.7% |
4.5% |
4.4% |
4.8% |
4.4% |
|
Inflation |
3.0% |
2.3% |
1.6% |
2.2% |
2.3% |
Source: Department of Commerce, Bureau of Labor Statistics.
You're seeing that right. The White House is counting on the economy growing about as fast as it did in the '90s, and with less inflation to boot.
I believe there's a technical term for this kind of forecasting optimism: Bullpucky.
Optimism, meet reality
Sure, this forecast isn't impossible. A few scenarios could bear it out. China could revalue its currency, causing U.S. exports to surge and giving companies like Coca-Cola (NYSE:KO) and Intel (NASDAQ:INTC) millions of new customers. Congress could tackle health care. Alternative energy could explode. Who knows … new sources of growth are never obvious. Very few people saw the internet propelling the economy in the '90s before it actually happened.
But even if we are blessed with some new growth driver, there are serious structural economic differences between today and the '90s.
Rapid GDP expansion is usually accompanied by price inflation, which keeps real growth in check. What was remarkable about the '90s was that big growth took place with very low price inflation (different from asset inflation, which was outrageous).
This happened for two reasons. The first was a surge in worker productivity thanks to new technology. But perhaps more important was government fiscal policy that deliberately followed a low-inflation mission. They called it Rubinomics, after then Treasury Secretary (and former Goldman Sachs (NYSE:GS) partner) Robert Rubin. Rubinomics wasn't complicated. Balance the federal budget and you'll lower inflation expectations, which lowers long-term interest rates, which fuels real growth. Simple stuff. For most of the '90s, long-term interest rates fell dramatically. (Here's a good chart.)
Today's situation couldn't be more night and day. Rubinomics meant a downward trend in the supply of Treasury bonds, which kept rates low. Today's trillion-dollar deficits mean exactly the opposite. Moreover, the Federal Reserve spent the better part of 2009 buying trillions of dollars of Treasuries and mortgage-backed securities issued by Fannie Mae (NYSE:FNM) and Freddie Mac (NYSE:FRE). It's going to need to sell a boatload of these securities in the not-so-distant future, which could jack up interest rates and put growth in a chokehold.
Explain yourself!
To be fair here, White House Council of Economic Advisors chair Christina Romer conceded that the forecast is a wee bit rosy. But she countered that high growth can be expected in times like these. As Reuters explained her view, the forecast "called for more modest economic growth than what has typically been seen following deep recessions."
Fair enough. It's generally true that severe recessions are followed by wicked rebounds. The harder the fall, the fiercer the recovery.
When is it generally not true? When the recession is caused by a financial crisis … like the one we just had. McKinsey and Co., one of the top management consultancies in the world, recently released a study of 45 historic bouts of economic shock. What did it find?
Empirically, a long period of deleveraging nearly always follows a major financial crisis … If history is a guide, we would expect many years of debt reduction in specific sectors of some of the world's largest economies, and this process will exert a significant drag of GDP growth.
So who knows, maybe the White House is right. But I wouldn't count on it.
