Research

Top forecaster predicts partly cloudy economy with a chance of showers

With the most accurate economic forecast among Blue Chip survey participants for the years 2006, 2007, 2008, and 2009, Dr. Sherry Cooper of BMO Financial Group is the winner of the 2010 Lawrence R. Klein Award for Blue Chip Forecast Accuracy. Overall, Cooper is cautiously optimistic about the country's prospects for 2011, based on the strength of U.S. dollar assets, a predicted gradual increase in consumer confidence and residential housing starts, and strength in both corporate profits and the U.S. stock market.

2010-10-22

In the face of an economy affected by a credit crisis, a housing slump, record unemployment levels, and the worst contraction since the Great Depression, it is no small feat to deliver economic forecasts that are both accurate and consistent.

For executing that very challenge, Dr. Sherry Cooper, executive vice president and chief economist for Canadian firm BMO Financial Group, received the 2010 Lawrence R. Klein Award for Blue Chip Forecast Accuracy last night at a ceremony in New York City, hosted by the W. P. Carey School of Business at Arizona State University.

The prestigious award is named after economist Lawrence R. Klein, who attended the ceremony on October 21 and is credited as the creator of modern economic forecasting. Paul Volcker, Cooper's mentor, chairman of President Obama's Economic Recovery Advisory Board and former Federal Reserve Board chairman, presented the award to Cooper.

As the winner, Cooper beat out some 50 other economists who submitted forecasts in four key indicators — gross domestic product (GDP), consumer price index (CPI), unemployment, and the Treasury bill rate — each January in the Blue Chip Economic Indicators newsletter.

She had the most accurate economic forecast among Blue Chip survey participants for the years 2006, 2007, 2008, and 2009. Cooper was particularly accurate in predicting "wide swings" in GDP growth. The four-year average error between Cooper's forecast and the actual value for GDP was an impressive .800. Her other four-year average error rates were: CPI, .525; Treasury bill rate, .550; and unemployment rate, .550, for an overall four-year average error of .606.

Looking back, looking forward

Clearly, as the Blue Chip winner, Cooper has proven her chops at determining how economic conditions play out over time. So, her predictions for 2011 — yes, we will see muted growth, and no we aren't likely to fall into a double-dip recession — carry considerable weight.

Overall, Cooper is cautiously optimistic about the country's prospects for 2011, based on the strength of U.S. dollar assets, a predicted gradual increase in consumer confidence and residential housing starts, and strength in both corporate profits and the U.S. stock market.

"The bottom line is that I am optimistic. I'm not claiming that [my forecast of] 2.2 percent growth in GDP or a 9 percent unemployment rate is great, but it's also not the end of the world. It's a lot better than it has been," she explained.

In her presentation at the ceremony, Cooper examined what the U.S. economy has been through, offering clarity on some of the financial trouble spots that have plagued the country. She also compared the United States' performance and predicted future growth with that of other major global economies.

For example, though the United States' 4.1 percent contraction in GDP from peak to trough was, as she put it, "painful," that number was actually "middle of the road" when compared with the other G7 nations. Germany, the United Kingdom, and Japan, for instance, fared far worse, with GDP growth rates of -6.5, -6.6, and -8.7 percent, respectively.

For 2011, Cooper believes economic growth in Europe will be weaker than in the United States, and predicts the emerging economies — including countries such as India, China, and Brazil — will continue to be the real growth leaders.

It's all About jobs

"Where the United States has truly suffered in an unprecedented fashion, has been in the loss of jobs," she said, referencing the nearly 8 million jobs lost during the recession. "That has really been the unhinging of confidence levels in this country. The loss of jobs has been a grave concern for the population, compounded by the fact that so many people lost so much money in their 401Ks because of the sell-off in stock, and also lost so much value in their real estate."

The employment picture is still not too rosy today, she admitted. The current 9.6 percent unemployment rate has improved from its high of 10.25 percent earlier this year, but Cooper puts at 17.1 percent the broadest measure of real unemployment — which includes workers that have given up looking for jobs and the people who are involuntarily working less than full time. In addition, the 8-month average duration of unemployment is also a record high.

Cooper does, however, predict job growth for 2011 — albeit slow — because corporate profit is now stronger than it was prior to the financial crisis. Though payroll numbers have remained stagnant, indicating that businesses don't feel confident enough yet to rehire in a dramatic way, firms are cash-rich and will eventually use that capital for hiring, she said.

"Businesses have increased investments in machinery and equipment … and I believe, at least in part, that we will see businesses rehire and expand their payrolls starting in 2011," she noted. In addition, Cooper pointed to an increase in hiring numbers, a declining number of layoffs, and leading indicators for employment — like temporary employment, average hours worked, and initial unemployment insurance claims — signaling at least a moderate pickup in private sector jobs.

Consumers and homebuyers still wary

Naturally, if the jobs situation rebounds, consumer confidence is likely to improve with it, and consumer consumption could again have a positive impact on the economy in 2011. "Consumer confidence numbers are still far too low, but we think consumption growth will contribute to GDP next year. We predict only a 2.2 percent consumer spending increase, but that is a lot better than the -1.2 percent contribution we saw in 2009," Cooper explained.

She pointed to the staggering 2 million Apple iPads that have flown off the shelves since the technology's release in April 2010 as evidence that consumers are still willing to spend in this economy. Consumption is not likely to return anytime soon to its position of being more than 70 percent of GDP, which it was at the economy's peak — a fact Cooper believes is a good thing.

"That rate of consumption is simply not sustainable because in fact it was financed largely by debt," she said. Consumers have learned one valuable lesson in all this, she added. "Americans realize now that there is no way you can spend more than you earn over the course of your career and end up living comfortably in retirement," she noted.

Housing — the other major domestic economic inferno — is still problematic as well, with the real estate market remaining in pretty dire straits. The hardest-hit states like Florida, Arizona, and Nevada may still be struggling (and the latest foreclosure crisis is not likely to help the situation) but there is some good news, she noted.

Cooper feels the real estate market has bottomed in many places, and housing starts have slowly begun to pick up. "In 2011 we will see residential construction contribute to GDP growth for the first time in six years," said Cooper of her prediction of a 0.1 percent increase in residential constructions' impact on GDP. "It will not make a big contribution but it is much better than the -1.1 percent we saw earlier in this cycle."

Against this stormy domestic backdrop, inflation is nowhere to be seen, Cooper explained, pointing out instead a real deflation risk thanks to core inflation running at less than 1 percent year over year.

To help the United States avoid a deflationary economic fate like that of Japan — the country has endured 10 years of deflation and contraction in its economy — Cooper believes Federal Reserve Chairman Ben Bernanke will attempt to spur the economy by enacting a practice known as QE2, or quantitative easing, a policy often invoked when the normal methods to control the money supply, such as reducing interest rates, have failed.

"The Fed will likely purchase about $150 billion worth of U.S. Treasury bonds during its next few meetings, which will increase liquidity in the system and lower bond yields below where they would otherwise be," Cooper explained. But large deficits have left the public — and politicians — skeptical of this type of government action, which could mean fiscal restraint will win out in 2011, something Cooper sees as a major risk.

"I do fear that substantial fiscal restraint in 2011 could lead to a double dip," she said, citing the example of the impacts of Britain's aggressive government spending cuts. "Clearly the United States needs a longer-term plan for deficit and debt reduction, but there is no easy way to do that," she added. "Balancing the budget will require very painful changes in Social Security, Medicare and defense. And at this stage, how many politicians are going to support that?"

Dealing with debt

Though the country is currently carrying, and will continue to carry, high levels of government debt — Cooper forecasts a 73 percent debt-to-GDP ratio for next year — the positive news is that the United States government has no trouble financing that debt. "Unlike Ireland or Greece, the United States has its own currency; the U.S. dollar is the global reserve currency; and banks and foreign governments are pouring money into U.S. treasuries," Cooper explained.

"Even when times are terrible, the world still moves into U.S. dollar assets," she added, referencing the spike in the U.S. currency that occurred between July 2008 and March 2009 during the worst of the credit crisis. "Not only did the U.S. dollar peak during that time, but the stock market bottomed and has been rallying more or less since then."

Cooper expects the markets to remain strong, lead by the NASDAQ, which, she said, "has been the best-performing index in the world with almost 94 percent gain as of market close today." The S&P 500 is also up, some 74.4 percent from its low on March 9,2009, she added.

"So, the bottom line is that there are challenges and there are risks to the forecast, like fiscal restraint, ongoing corporate deleveraging, unemployment and consumer confidence levels," she remarked in closing. She cited "immense opportunities" for the United States to serve the increasing number of middle class families from emerging economies that will enter the global marketplace for American goods and services.

She also espoused her faith in American innovation and higher education as proving grounds for future business stability. "There is more research and development spending per capita in the United States than in any other country, and America still has the top universities in the world. We attract the best and the brightest minds from everywhere, and that will continue to be huge."

Economics