Policymakers, Analysts See Sluggish Growth as Reforms Take Shape

Even as they agree that the economy has turned the corner and emerged from recession, policymakers and private analysts told NABE’S 51ST Annual Meeting in St. Louis that they doubt the recovery will be robust enough well into 2010 to either create many new jobs or pose a threat to inflation.

More than 230 attendees at the October 10-13 meeting at the Hyatt Regency heard top monetary policy officials and senior officials from the Obama administration offer their latest projections on how the economic expansion is likely to strengthen in coming months.  While generally optimistic, speakers cautioned that there could be economic surprises or new challenges ahead as financial market and housing reforms evolve.

Keynote speakers included Federal Reserve Vice Chairman Donald L. Kohn, Federal Reserve Bank of St. Louis President James Bullard, National Economic Council Director Lawrence Summers, and Assistant Treasury Secretary for Economic Policy Alan Krueger. 

Concurrent sessions focused on a range of hot topics, including fiscal policy implications, health care overhaul legislation, and the global outlook for economic growth and trade. Former Secretary of Health and Human Services Tommy Thompson spoke to a general session on health care reform, predicting passage of a comprehensive bill with a public option right before Christmas. [link to his presentation]

Coverage of the annual meeting in this issue includes separate reports on:  “What’s Next for the Auto Industry?” by Rajeev Dhawan, “Emerging Markets: Performance in the Post-Crisis Period” by Parul Jain, “Career Strategy in the New Environment” by Chad Moutray, and “Annual Meeting, Survey Garner Strong Media Coverage” by Melissa Golding.

Weighing in on the economic outlook, NABE officers October 12 released the results of the organization’s latest survey showing that while “the Great Recession is over,” a large majority of economists “believe the economic recovery is likely to be more moderate than those typically experienced following steep declines.”

New NABE Officers, Executive Director Assume Office

Following its long tradition, NABE installed newly elected officers and board members at the end of the annual meeting.  Lynn Reaser, chief economist at Point Loma Nazarene University in San Diego, became president, succeeding Chris Varvares, president of Macroeconomic Advisers LLC in St. Louis.  Richard Wobbekind, associate dean of the University of Colorado-Boulder’s MBA and Executive Programs, succeeded Reaser as vice president.  Reaser outlines her priorities and plans for the coming year in her letter to members in this issue.

Also with the close of the annual meeting, Susan Doolittle retired as executive director after serving in that position since 1993.   Tom Beers, whose appointment was announced in June, is the new executive director. 

In his presidential address on October 12, Varvares told meeting participants that economists need to restore public confidence in their profession by sharpening forecasting tools and trying to do a better job calling turns in the business cycle.  “We as a profession missed it,” he said.  “We assumed more rational behavior” than was the case and “we didn’t see the fragility of the financial system,” he said.

It is important for business economists to recognize “the central role they can play in educating the public” about the economy, Varvares said.  “It’s a tale of two crises: one that we missed and one we can’t afford to.”  His presidential address will be published in Business Economics.

Varvares thanked the three co-chairs of the annual meeting organizing committee:  Charles Steindel, senior vice president at the Federal Reserve Bank of New York; Kevin Kliesen, economist at the Federal Reserve Bank of St. Louis; and Robert Fry, senior associate economist of DuPont Corporation.  Other members of the committee include: Reaser, Stuart Macintosh, Bryan Bezold, Candice Hynek, and Diane Swonk.

Marking 51 Years of NABE History

At the NABE president’s welcome reception and dinner that followed the evening of October 10, the organization observed its 51st year anniversary.  Several past presidents attended the meeting.

David Wessel, economics editor of the Wall Street Journal and author of the book “In Fed We Trust,” told the October 10 dinner gathering that he believes the Federal Reserve was slow to realize the extent of the housing crisis as it worsened in late 2007 and early 2008. After the collapse of Bear Sterns, it became clear that the Fed and the Treasury Department lacked a contingency plan to deal with the financial crisis, he said.

Even as the economy and the financial system have stabilized, many Americans are concerned about the Federal Reserve’s vastly expanded role as it evolved in the rescue effort, Wessel said.  “The Fed is unpopular in the polls, more unpopular than the IRS, because it’s so powerful it makes people uncomfortable,” he said.  One of the biggest challenges the central bank will face is dealing with threats to its independence, Wessel said, citing calls by some members of Congress for more oversight of the Fed and restrictions on its powers as banking and other financial system reforms are debated by lawmakers.

Fed Vice Chairman Kohn Expects Subdued Recovery

In his luncheon speech of October 13, Fed Vice Chairman Kohn said that unlike other recent recoveries, the current turnaround is likely to be more subdued because of “difficult conditions in the labor market and the consequent implications for household incomes,” among other factors.  “I do expect a gradual strengthening of economic activity,” supported initially by fiscal stimulus, he said.

Kohn said he expects inflation to remain “subdued,” and that “for a while, the risk of further declines in underlying rates of inflation will be greater than the risk of increases.”  He based this expectation on the assumption that the economy will grow below potential for some time and that “inflation expectations are more likely to fall than rise over time as the level of real activity remains persistently less than its potential and actual inflation remains low.”

A member of the Board of Governors since August 2002, Kohn was appointed to a full term 14-year ending in January 2016.  He will serve as vice chairman through June 2010.

Bullard Focuses on Policy Rules

In his October 11 address to the annual meeting, St. Louis Fed President James Bullard, currently an alternate member of the Federal Open Market Committee, focused on what he sees as a need for a Taylor-type policy rule that would guide the central bank in its asset purchase program.   Such a rule would allow the Fed to better communicate how asset purchases could be adjusted as economic conditions change, while remaining consistent with its goals of ensuring price stability and sustainable economic growth.

“Liquidity programs are shrinking, but the asset purchase program is only partially complete,” Bullard said.   While the asset purchase program has been a successful tool for easing, it has expanded the monetary base and “may lead to inflation in the medium-term, depending on markets’ expectations of monetary policy going forward,” he said.  

Summers Expects Weak Demand to Curb Growth

As the 2009 recipient of NABE’s Adam Smith Award, National Economic Council Director Lawrence Summers told the annual meeting that the huge economic stimulus program has been successful at reviving the economy. “Nine months ago we were debating whether it would become a depression,” he said, acknowledging that there is a long road ahead in terms of returning to strong growth in business investment and jobs.

The unusual depth and breadth of the recession and other factors may have caused shifts in the economy that won’t be clear for some time, Summers said.  Even with the 2001 recession and recovery, new patterns emerged that meant much weaker employment growth for a couple of years into what became known as the “jobless recovery,” he noted.

In terms of job growth, Summers said that currently,  “we have an unsatisfactory state of affairs and we could see unemployment at 10 percent.”  He added that each percentage point of unemployment adds to the national debt. “There is no higher economic priority ” than increasing the rate of economic growth and the rate of job creation,” he emphasized, adding that “lack of demand will be a major constraint on employment growth for the foreseeable future.”   Capacity utilization rates and a continued reworking of household balance sheets also “raise questions about the sustainability of job growth,” he said.

Going forward, the Obama administration is mindful of the importance of supporting U.S. exports and restoring confidence of both consumers and businesses in order to boost economic growth, Summers said.  As is tradition, Summers’ Adam Smith address will be published in Business Economics.  A podcast of Summers’ address is online.

Krueger Urges Review of Forecasting Tools

In his October 12 luncheon address, Assistant Treasury Secretary for Economic Policy Alan Krueger encouraged NABE members to assist in what he called an urgent need for reviewing federal economic statistics and how they might be improved to provide warnings of crises in the future.

The former Princeton professor and researcher said that while he came to Treasury as someone well acquainted with principal economic indicators, he has been “constantly surprised at how little quantitative information can be brought to bear on fundamental policy questions, or, alternatively, how difficult it can be to find valid data on important and well-defined economic variables.” Some of the gaps pertain to lack of timely measures, as well as  “the fact that existing data are not useable or sufficiently detailed, or that relevant data simply do not exist.’

The Treasury official took the opportunity to push for support of the Obama administration’s proposed regulatory reforms, in particular those that address statistical measures and their deficiencies.  “Some of the most pressing gaps that surfaced in our financial data in the last year, such as counterparty risks in the derivatives market, would be addressed if the Administration's regulatory reform proposals were enacted,” he said.  The proposed reforms include the creation of an Oversight Council of Regulators that would “scan the horizon for new financial market developments that necessitate new data collection efforts, so that regulators can accurately assess system-wide risks in a timely fashion.” 
Krueger also proposed that NABE consider assisting in a new endeavor that would focus on evaluating private sector data series that might be useful in signaling crisis or problems in the system.  “One way to achieve this is to have a minimal set of guidelines for data collection and construction, combined with a process to certify that a given statistic meets these standards.  For instance, producers of survey-based data would need to be encouraged to provide information about response rates, sample construction, and how any constructed measures are defined, and would need to make their survey instrument public.  Knowing this would, at a minimum, allow comparison with a set of best practices,” he said.

A certification process could be developed that would ensure standards were met and private sector data would gain credibility, he suggested.  “The responsibility for such certification could also be placed in the hands of a private organization, preferably one with a demonstrated interest in and commitment to excellence in economic data.  Indeed, an organization like NABE would be a perfect candidate to act in this capacity—perhaps in conjunction with AAPOR [American Association for Public Opinion Research]—as this duty would dovetail well with NABE's longstanding encouragement of statistical best practice,” he said.

Text of many speeches and presentations made at concurrent sessions are available on the annual meeting’s session pages.

Share: