The CBO Confuses the Economic Picture

The Congressional Budget Office has weighed in on the unclear economic future and their view makes things even less clear.

The state of the economy is particularly uncertain at the moment. The pace of economic growth slowed in 2007, and there are strong indications that it will slacken further in 2008. In CBO’s view, the ongoing problems in the housing and financial markets and the high price of oil will curb spending by households and businesses this year and trim the growth of GDP. Although recent data suggest that the probability of a recession in 2008 has increased, CBO does not expect the slowdown in economic growth to be large enough to register as a recession.2 Economic performance worse than that suggested in CBO’s forecast could significantly decrease projected revenues and increase projected spending. Furthermore, policy changes intended to mitigate the economic slowdown would, by design, tend to increase the budget deficit in the short term.

Obviously, everyone and their mother makes a prediction on the future of the economy and more often than not they are wrong, even respected groups like the CBO. That said, they don't see a recession but rather a slow down. They see an increase in the budget deficit which would put inflationary pressure on the market. (that's because we would owe more and thus borrow more and thus put pressure on interest rates) If they are correct, and of course as my late friend loved to say

if if was a fifth we'd all be drunk

if they are correct, then, again, the Fed is taking drastic action when tempered action is appropriate. The CBO predicts a softening of the economy but no recession and an increase in the budget deficit. If that is the case, the Fed's action will absolutely as I predict cause inflation when they are trying to stop a recession. In fact, the CBO's prediction essentially mirrors what I have been saying about the market.

What all of this means is that the picture gets more and more murky as the days go by. There has been a flurry of economic data and none of it paints a clear picture. The markets have become schizophrenic and there is frankly confusion everywhere.

The only thing that isn't confused is the movement of the Fed. They have aggressively cut rates in a disposition that considers a recession not merely a possibility but a certainty. As I said, the unemployment rate, 5%, the GDP, growing at 3.6%, the stock market, still near all time highs, the dollar, at all time lows, oil, near all time highs, give a much more confused picture.

Given the growing murky economic picture, it seems more and more clear daily to me that the Fed is responding to emotion rather than logic. They are doing exactly what they aren't supposed to be doing. They are selected on elected specifically because they aren't supposed to respond emotionally. I hope I am wrong however the CBO's findings lend more credence that I am not.