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Irwin Kellner
May 31, 2011, 9:07 a.m. EDT
By Irwin Kellner, MarketWatch
PORT WASHINGTON, N.Y. (MarketWatch) "” Most economists did not think that the economy would hit another soft patch so soon after emerging from the last one.
Now that the current quarter is two-thirds finished, it is rapidly becoming apparent that, for the second quarter in a row, pundits overestimated the pace of economic activity.
They missed the first quarter's growth rate by a wide margin. Instead of the 4% expected by the consensus forecast at the turn of the year, the economy instead grew at only a 1.8% clip.
As I pointed out in my column of April 19 , these great expectations sprang from a reasonably good holiday-shopping season, rising employment and several other positive indicators.
CEO pay rises last year by about 11%, according to a Wall Street Journal annual CEO pay survey.
But by the time the first quarter arrived, the economy began to be buffeted by a number of headwinds, among them a sudden jump in oil prices; Japan's earthquake, which produced shortages of key components for cars and other goods; and the flap over Washington's budget, which led to a near-shutdown of the federal government.
The past winter's storms and housing's continued problems also subtracted from the first quarter's growth.
Undaunted, economists cranked up their models and came up with forecasts that showed growth bouncing back to as much as 3.5% in the current quarter. They figured that these headwinds would abate and/or be offset by other, more positive developments.
Well it looks like they were wrong again. As the data for April and May unfolded, many economists began to back off from these sunny views. The MarketWatch consensus now expects an increase of just over 3% for the second quarter.
In my view (which has been consistent, by the way), these forecasts will once again prove to be too optimistic. Energy prices are still high, the pols are bent on cutting spending and thus dragging economic growth, and inflation continues to wreak havoc with people's budgets.
Housing remains in the doldrums, factory output is still feeling the effects of the disruptions in the supply of components because of Japan's earthquake, and to top it off, gains in employment appear to be abating.
The second quarter began on a weak note, with April's retail sales actually declining, once higher prices were factored out. ( See column of May 17. ) It will also suffer from a sharp upward revision in the first quarter's business inventories: The combination of rising inventories and falling sales never augurs well for growth going forward.
And don't be misled by a report suggesting that consumers are more cheerful than they used to be. Consumer sentiment is an unreliable guide to what households actually wind up spending.
People might feel cheerful when they are contacted by pollsters surveying their moods and even their buying intentions, but they could easily have a different demeanor when it comes time to make (or not make) a purchase.
This is especially true if something has changed in their world, such as the stock market falling, another bout of bad weather, or a family member's losing his job.
As I opined two weeks ago, I believe that a 2% annual rate of growth over the current quarter and the next two is about the best we can expect.
Irwin Kellner is MarketWatch's chief economist.
"Irwin Kellner: What, me worry? http://bit.ly/kmynDb" 11:38 p.m. EDT, May 30, 2011 from MktwKellner
"Irwin Kellner: Tear down this ceiling! http://bit.ly/j27dL2" 11:06 p.m. EDT, May 23, 2011 from MktwKellner
"Irwin Kellner: Don't be fooled by the money illusion http://bit.ly/kR274c" 11:14 p.m. EDT, May 16, 2011 from MktwKellner
"Irwin Kellner: Hi-yo Silver, and away! http://bit.ly/mqSsKS" 11:05 p.m. EDT, May 9, 2011 from MktwKellner
Irwin Kellner, MarketWatch's chief economist since 1998, writes a weekly column on the economy and the financial markets. He has been a leading economist for more than 40 years and previously served as chief economist for North Fork Bank, Chase, Chemical and Manufacturers Hanover. Widely quoted by the media in the U.S. and abroad, Kellner regularly addresses groups of business people and community leaders and appears regularly on Cablevision's News 12 Long Island.
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