NABE Downgrade of Real GDP Bodes Ill for Colorado

The National Association of Business Economists (NABE) released its fall consensus forecast in early October. NABE revised its outlook for output from 3.2% (in May) to 2.6% based on lower than anticipated economic activity during the summer months.

In addition, NABE indicated that modest growth in consumer spending is on tap through 2011. Consumers will remain cautious as a result of continued high unemployment and weak gains in employment. As well, minimal growth is expected in household net worth, i.e. small gains are expected in equity portfolios and home prices

Finally, NABE opined that the downward revision in the forecast reflects “a greater appreciation of the importance of stimulus policies in countering forces holding down the economy’s performance.”

While it is not surprising that NABE lowered its expectations for expansion of the economy, the amount of the decrease is reason for concern. In simplistic terms, the May forecast suggested that the U.S. would see above potential growth this year while the October forecast now says that growth will be well below potential.

Were the NABE panelists overly anxious to see a recovery or did the positive impact of the stimulus package on Q1 Real GDP cause them to be overly optimistic in their May outlook? Clearly panelists missed indicators of the summer slowdown in their May forecast; are there other factors, favorable or unfavorable, that panelists may have missed in their October update?

The revisions in the NABE forecast illustrate the challenges that economists and business researchers face in evaluating and forecasting the performance of the economy. Many of the econometric models that have worked well during periods of growth have proven to have limitations caused by the volatility of the economy over the past decade. This is not intended as criticism, but rather an illustration of the challenge our public and private sector leaders face when they are forced to make decisions without perfect information.

While Colorado is a great place to conduct business, the underlying message from the NABE forecast bodes ill for Coloradans. Lackluster growth at the national level translates into an extended recovery for the Colorado economy, i.e. there will be limited job growth on the horizon.

©Copyright 2011 by CBER.

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