Bernanke Plays the Role of the “Two Handed Economist”

Posted by David Rosenberg - Gluskin Sheff

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As wishy-washy as it gets, but in the end, hope won out over despair. The speech by Fed Chairman Bernanke was all over the map and was noncommittal in terms of offering an iron clad forecast despite the title being The Economic Outlook and Monetary Policy.   The sermon was littered with caveats in the form of “should”, “despite”, “although”, “possibly”, and “however” — but in the end, he expressed optimism (then again, what else can he do in public?).  He obviously learned his lesson from using words such as “unusually uncertain”, which he used to describe the economic outlook at his recent Congressional testimony in July when the Dow responded by diving 109 points (as if things haven’t become even more uncertain since, but why tell anyone?).

Here are some of the snippets from the speech — Mr. Bernanke seems to have a different crystal ball than we do, as he is optimistic that growth will be sustained in the second half of this year and improve next year.  At the same time, he acknowledges that the economy has not improved as much as the Fed was forecasting earlier (that is old news).  But what really stood out in his speech was the extent to which it was so “on the one hand, but then on the other hand”, which of course is why economists are constantly ridiculed.

On the one hand …

• “For a sustained expansion to take hold, growth in private final demand — notably, consumer spending and business fixed investment — must ultimately take the lead.  On the whole, in the United States, that critical handoff appears to be under way.”

• “Expansionary fiscal policies and a powerful inventory cycle, helped by a recovery in international trade and improved financial conditions, fueled a significant pickup in growth.”

• “Stronger balance sheets should in turn allow households to increase their spending more rapidly as credit conditions ease and the overall economy improves.”

• “I expect the economy to continue to expand in the second half of this year, albeit at a relatively modest pace.”

• “Despite this recent slowing, however, it is reasonable to expect some pickup in growth in 2011 and in subsequent years.”  [Ed note: the markets picked up on this].

• “Despite the weaker data seen recently, the preconditions for a pickup in growth in 2011 appear to remain in place.”

• “Consumers are reducing their debt and building savings, returning household wealth-to-income ratios near to longer-term historical norms. Stronger household finances, rising incomes, and some easing of credit conditions will provide the basis for more-rapid growth in household spending next year.”

… But on the other hand

• “However, although private final demand, output, and employment have indeed been growing for more than a year, the pace of that growth recently appears somewhat less vigorous than we expected.”

• “Notwithstanding some important steps forward, however, as we return once again to Jackson Hole, I think we would all agree that, for much of the world, the task of economic recovery and repair remains far from complete.”

• “At best, though, fiscal impetus and the inventory cycle can drive recovery only temporarily.”

• “Incoming data on the labor market have remained disappointing. Private- sector employment has grown only sluggishly, the small decline in the unemployment rate is attributable more to reduced labor force participation than to job creation, and initial claims for unemployment insurance remain high. Firms are reluctant to add permanent employees, citing slow growth of sales and elevated economic and regulatory uncertainty. In lieu of adding permanent workers, some firms have increased labor input by increasing workweeks, offering full-time work to part-time workers, and making extensive use of temporary workers.”

• “The prospect of high unemployment for a long period of time remains a central concern of policy. Not only does high unemployment, particularly long- term unemployment, impose heavy costs on the unemployed and their families and on society, but it also poses risks to the sustainability of the recovery itself through its effects on households’ incomes and confidence.”

• “Although what I have just described is, I believe, the most plausible outcome, macroeconomic projections are inherently uncertain, and the economy remains vulnerable to unexpected developments.”  [Ed note: the market did not pick up on this].  In the final analysis, if there was a commitment made, it is that Mr. Bernanke will use all of his power to ensure that the recovery will remain intact:

“The Committee will certainly use its tools as needed to maintain price stability– avoiding excessive inflation or further disinflation–and to promote the continuation of the economic recovery …. the Federal Reserve remains committed to playing its part to help the U.S. economy return to sustained, noninflationary growth.”

What is interesting is the choice of the word “return” to “sustained” growth, which implies that despite his high hopes for the future, this is a state (the word “return” by definition means “revert to a previous state”) we have to achieve (sustainable growth) which is remarkable when one considers all the radical efforts that the central bank and the government have made to bolster the economy.  As we are finding out, even with an extremely aggressive central bank, just because you turn the key doesn’t mean the engine turns over.

Also in Lunch with Dave:

• Revisionists unite! Economists are now in the process of cutting their GDP forecast for the U.S.

• U.S. real GDP better than expected, but …

• Consumer sentiment, as per the University of Michigan index, came in a tad below expected in August, at 69.6

• Market commentary: Dow below the 10k mark and the S&P is trading close to that 1,040 line; bonds hitting some major resistance, but the trend in yields are still clearly down

• Deflationary expectations: consumers in the U.S. are holding off to buy back-to-school items in hopes of lower prices to come

• The bear market in housing starts is still far from over

• Initial jobless claims improve but it could be a headfake due to seasonals; keep it simple, claims are at recessionary levels

• Kansas yes, Royal no: the KC Fed index collapsed in August

• You call this good news? Mortgage delinquency dipped to 9.85% from 10.06% a year ago

• What is a depression anyway?

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