If Federal Reserve Chair Janet Yellen were incapable of telling a lie, she might say something like, “We appear perpetually optimistic because we’re afraid of the market reaction if everyone found out what we really think.”
Dishonesty would certainly help to explain the Fed’s atrocious economic forecasts.
In December 2014, the Fed governors expected the economy to expand at a pace of 2.6% to 3.0% (central tendency of real GDP growth).
Actual 2015 growth will wind up around 2.1%. That’s below even the 2.5% expansion posted in 2014, as I warned it would be in last year’s economic outlook.
Yet, in spite of flagging GDP growth and sub-2% inflation, the Fed decided to raise short-term interest rates.
As I predicted in a recent Saturday Spotlight, long-term rates have declined since the rate hike. The bond market senses a major economic growth problem, and I think it’s correct.
Last year, I suspected that the drop in the price of crude oil and, hence, gasoline, would not be a huge boon for the economy. Many prominent economists disagreed with me.
As it turns out, consumers, by and large, didn’t end up spending their gas savings (more on this later).
Plus, the bigger story is how collapsing crude oil and natural gas prices turn the energy sector into an anchor around the neck of the U.S. economy.
According to Goldman Sachs, 30% of total S&P 500 capital expenditures (capex) came from the energy sector in the last 12 months. That’s still the highest percentage of any sector.
Add on the materials and industrials sectors, and we’re talking about 45% of total U.S. capex. Don’t let anyone tell you these sectors don’t matter anymore in our “technology- and services-driven economy.”
In 2015, capex – which serves as a powerful economic stimulus – is likely to experience its first annual decline since 2009. As I see it, lower corporate spending is still an underappreciated economic headwind.
