Financial World Relies on Key Groups to Track the Economy

Over the years, the closely watched “yield curve” has been fairly adept at signaling the onset of U.S. economic recessions. When short-term Treasury yields exceed long-term yields, an economic slowdown often results. When such a yield “inversion” occurred in late 2005, some economists pointed to it as an indication that a recession was approaching. Some two years later, the economy indeed fell into recession.

A yield curve inversion would seem to be a fairly straightforward method for ascertaining the direction of the economy, but more often than not, matters are not so simple. This is evidenced by the committees and teams who join forces to study the economy and weigh in with predictions and forecasts. Here’s a look at some of the key organizations that bring together the world’s most powerful and influential economists.

Beyond the Curve

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The Federal Reserve’s Federal Open Market Committee is ground zero for information about the possible future of interest rates. The committee is composed of the seven members of the Federal Reserve Board and five of the 12 Federal Reserve Bank presidents. They meet nine times a year to set monetary policy. Even though the FOMC announces its decisions immediately after each meeting, the announcements are couched in sterile language that does little to indicate what really happens during the meetings. It’s a bit like hearing the score of a football game without seeing any of the action — the score reveals the outcome but not the drama. The real action can be seen in the meeting minutes, which are usually released a few weeks later. Analysts and journalists pore over the minutes for clues about whether the committee was divided, what specific concerns were discussed, and what data motivated the committee’s decision.

The Wall Street Journal’s Economic Forecasting Survey also showcases competing views. This monthly poll of more than 50 economists reveals predictions of major economic indicators, such as inflation, interest rates, taxes, and employment. Their consensus forecasts are published in the newspaper each month, but their individual views are sometimes more interesting. To adapt an old saying, 50 heads are better than one, and considering the differences among the surveyed economists can sometimes provide clues about how they reached their consensus views.

The National Bureau of Economic Research’s Business Cycle Dating Committee has the last word on when recessions start and end, even though their judgments sometimes come years after the fact. This cautious group of academics uses a broad measure to define a recession: not simply two quarters of declining gross domestic product but also weakness in income, employment, production, and sales. Although the business cycle committee gets most of the headlines, the NBER itself might be the most prestigious collection of economists in the world or in history. Many of its members are Nobel Prize winners; several have served as economic advisers to the president of the United States or as governors and chairmen of the Federal Reserve.

Everyone has an opinion, but clearly not all opinions are equal. Considering the views offered by the best of the best may help with decisions about your Naperville Investments portfolio.

1) The Wall Street Journal, August 16, 2010

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Friday, March 25, 2011