Almost exclusively because we have a Dark Heart, we want to get a head start on preparations for the second anniversary of Paul Krugman's bold interest forecast. Roll the tape from March 11, 2003, please; his lead:
With war looming, it's time to be prepared. So last week I switched to a fixed-rate mortgage. It means higher monthly payments, but I'm terrified about what will happen to interest rates once financial markets wake up to the implications of skyrocketing budget deficits.
Today, despite the war, financial markets continue to slumber - as of March 3, 2005, the Federal Reserve tells me that fixed rate mortgages were at 5.79%. Robert Samuelson puzzled over this a few days back.
Perhaps the Earnest Prof is a bit stronger when forecasting equities? Let's check his stock market call of June 20, 2003; with the S&P 500 closing at 994.7 on June 19, 2003, Krugman wrote this:
The big rise in the stock market is definitely telling us something. Bulls think it says the economy is about to take off. But I think it's a sign that America is still blowing bubbles — that a three-year bear market and the biggest corporate scandals in history haven't cured investors of irrational exuberance yet.
Or, to put it another way: it's hard to find any real news to justify the market's leap. Instead, investors seem to be buying stocks because they are rising — which is pretty much the definition of a bubble.
As of this writing on March 4, 2005, the S&P is at 1221, up 11 on a good jobs report.
There is very little evidence in the data for a strong recovery ready to break out. As far as I can make out, Mr. Greenspan's optimism is entirely based on models predicting that tax cuts and low interest rates will get the economy moving.
Let's put in some numbers from Economagic: here is quarterly GDP growth, on an annual basis, starting with the third quarter of 2003:
2003 Q3 - 7.4%; 2003 Q4 - 4.2%
For 2004, the quarterly growth figures were 4.5%, 3.3%, 4.0%, and 3.8%.
Total non-farm employment, July 2003: 129,857,000; as of Jan, 2005 it was 132,573,000. That is an average of 150,000 new jobs per month. The latest jobs report, showing 262,000 new jobs (and with small upward revisions to the past few months) will improve that average.
Since this is my lucky day, I will drag in Paul Krugman's column from Aug 15, 2003, where he instructed us that "Just to keep up with population growth, the U.S. needs to add about 110,000 jobs per month".
We remain confident that all of these forecasts were based on his professional opinion, and were not influenced by his political views.
MORE: We mocked his stock market forecast, and a few others, back in June 2003; we identified the Key Krug-Rule in this post (and glumly conceded the probability of higher taxes in the comments section, driven wailing before the iron lash of Brad Delong.)
UPDATE: We are all in agreement, then - Paul Krugman admits "my forecasting record is not great."