Wednesday, July 07, 2004

Yesterday the General highlighted an AP report which the Los Angeles Times among others ran claiming "many analysts" are predicting US GDP growth for 2004 to come in at a healthy 4.7% clip. AP is so confident that it cooked up this nice little graphic for us, too!

It turns out that "many analysts" is a euphemism for the economic advisory committee of the Bond Market Association, a trade association representing securities firms and banks that underwrite, trade and sell debt securities. More growth equals more corporate bonds to peddle!

Since the Bond Market Association is predicting 4.7% growth for 2004, and allowing the General to assume for the sake of argument steady growth over 2004:II-IV, GDP for the quarter just ended is going to have to come in at 4.94%. This after 2003:IV growth of 4.1% and 2004:I growth of 3.9%. For a full 1% increase in GDP growth from last quarter one would think there would be lots of signs all around of increasing strength, but instead we signs of decreasing strength: a record-smashing trade deficit in April, a waning jobs picture in June, flagging retail sales especially in cars but also at Wal-Mart, a big June slowdown in the growth of the services sector, and a falling dollar since mid-May.

But maybe the Bond Market Association knows something we at the Globblog don't? After all, they're economists at Goldman Sachs, Bank One, Credit Suisse First Boston and the rest, and the General is but a simple college professor of political economy and amateur blogger. So does the BMA know best?

In June 2003 the BMA predicted "2 percent GDP growth in the second quarter [of 2003], followed by 3.5 percent growth during the second half of this year [2003] and 3.6 percent growth next year [2004] measured fourth quarter to fourth quarter." (Market News International, 24 June 2003) The reality? 3.1% growth in 2003:II, 6.1% growth in 2003:III-IV. Clearly BMA was far too pessimistic about 2003.

In June 2003 "Committee members continue to expect a turnaround in business investment following a contraction in this year's first quarter. The median prognosis is for steady if unspectacular acceleration, with a 3.1 percent gain in the second quarter, increasing to 5.3 percent in the third quarter and 6.3 percent in the fourth quarter." The reality? A 7.0% rise in 2003:II, 12.8% in 2003:III and 10.9% in 2003:IV. Again, way off.

How about interest rates? The BMA said in June 2003 "The yield on the 10-year Treasury note is expected to rise to 3.50 percent by September of this year and 4.63 percent by September of next year. Home mortgage rates are also expected to increase, with 30 year fixed-rate mortgages reaching 5.4 percent in September of this year and 6.2 percent in September 2004." The reality? 4.27% on the 10-year in September 2003 (up from 3.33% in June) and it already topped 4.63% in May of this year. 30-year mortgages also rose much faster than the BMA could see, to 6.15% in September 2003 (up from 5.23% in June) and again already topping their predicted 6.2% by May 2004.

That's obviously a pretty hazy crystal ball the BMA is gazing into. 4.9% GDP growth for the second quarter? Judge them on their track record, not their name plates.


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