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Feb 20 2015

Conflicting Concerns

The January Fed minutes released this week were dominated, as usual, by a litany of conflicting concerns. Buried within it, though, was a significant sentence echoing our apprehension that the available policy tools have become unworkable: “The risks to the forecast for real GDP growth were viewed as tilted a little to the downside, reflecting the staff’s assessment that neither monetary policy nor fiscal policy was well positioned to help the economy withstand adverse shocks.” (italics ours). The desire to be better positioned to counter negative shocks lies at the root of the Fed’s reluctance to push off rate hikes.

That assessment was preceded by a section titled “Liftoff Tools and Possible Liftoff Options,” with regard to Fed rate hikes. As we noted last fall, “concepts like ‘lift-off’ and ‘escape velocity’ reflect the misguided fantasies of wannabe rocket scientists at the Fed” (USCO Essentials, November 2014), but have been insidiously influencing the framing of policy choices.

Fed economists are scarcely alone in indulging in such fantastical thinking. Paul Krugman, for instance, has written about how Isaac Asimov’s Foundation Trilogy inspired him to become an economist, and about how the “psychohistorians” of science fiction used “their understanding of the mathematics of society to save civilization as the Galactic Empire collapses… my secret fantasy was to become a psychohistorian.” The persistent misconception, rooted in such magical thinking, is that, somehow, trillions in QE finally ignited the U.S. economy’s rocket engines that are about to accelerate it to “escape velocity.”

But that simply cannot happen when people work more while being less productive, with real wages staying stagnant. In fact, productivity growth that stubbornly stays “way, way down,” as Fed Vice Chairman Stanley Fischer put it (USCO Essentials, January 2015), combined with cyclical downturns in manufacturing and construction growth, is likely to bring overall economic growth back down to earth, in turn dashing hopes of the economy breaking free of its terrestrial bonds.

It is in this context that ECRI’s analysis of our leading indexes for key sectors of the U.S. economy provide insights about risks not yet realized by the consensus.

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