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“I anticipate sluggish growth in the second half of this year” – Janet Yellen, 9/5/08

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It may be Tuesday, but equity markets have a case of the Mondays today as equity futures are lower across the board with the Nasdaq leading the way lower.  The catalyst for the weakness this morning appears to be weaker economic data out of China and Europe, but the reason for saying ‘appears’ is that sluggish growth would suggest a rally in bonds, but that hasn’t been the case as Treasury yields are higher across the curve. There’s not a lot of economic or earnings data to deal with today, but conference season is kicking off on Wall Street, and that can often be a time where companies lower forecasts, so be on the lookout for that throughout the day.

The quote above came just over two months into what was the second half of the year that then San Francisco Fed President Janet Yellen was referring to when she forecasted ‘sluggish’ growth. Sluggish would never be considered an adjective with a positive connotation, but it still doesn’t imply contraction.  During the third quarter of 2008, though, the US economy contracted 2.1%, which was the largest decline in US economic activity since Q4 1990. Keep in mind that when Yellen made that comment, the third quarter was already more than two-thirds into what was a 2.1% quarterly decline in GDP, and yet Fed officials along with their counterparts in the White House, as well as most Wall Street economists were still forecasting growth!  If you think that was bad, Q4 was even worse as the economy fell off a cliff. In the wake of the Lehman bankruptcy, GDP declined 8.5% for its largest decline since 1958! By the end of 2008 ‘sluggish’ growth wouldn’t have just been good, it had become a pipe dream!

This brings us to one of the morning’s lead headlines across just about every financial media outlet we have scanned, and that is the fact that Goldman Sachs has lowered its odds of a recession in the next 12 months down from 20% to 15%.  Giving odds for a recession in such a precise manner certainly makes for great headlines and it’s always good to have baseline forecasts but to think that something as complicated as the US economy can be forecasted with such precision is at best naïve.

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