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Does The Federal Reserve Really Know What They’re Doing?

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Danielle Marceau, Federal Reserve

With Danielle Marceau, Senior Economist with Prevedere

If you’re going to the beach and you want to know if it’s going to be sunshine or storm clouds, you could check grandma’s arthritic knees, pick up a divining rod, or maybe call Al Roker. When it comes to forecasting the economy, however, you’ll want a more scientific approach.

Danielle Marceau is a senior economist at Prevedere, where economic growth is predicted by identifying leading indicators and coming up with algorithms that have produced results with more than 85% accuracy. Prevedere defines their method as a “statistical combination of multiple leading macroeconomic trends, creating a single line representing the future momentum of the industry.”

Danielle says that the Federal Reserve, in contrast to the philosophy behind Prevedere, uses a reactionary method to measure economic growth, one based on the current state of the economy and not necessarily on looking into the future. An example of the disparity between the two systems concerns the employment numbers that just came out in May. The Fed had predicted the number of jobs added to be around 160,000, when, in reality, they came in at 38,000. Prevedere had actually predicted a lower number of new jobs based on their indicators, which included, for instance, the fact that corporate profits, small business confidence, and industrial production were all calling for weaker jobs growth.

It’s important to note, Danielle points out, that in spite of the slow growth we’re currently experiencing, we’re not looking at a contraction, a pulling back, but instead a period of deceleration, a softness in the economy.

Even factoring in for the uncertainty caused by Brexit, none of the leading indicators are foreshadowing an imminent recession in the US because of Great Britain’s divorce proceedings from the European Union.

This optimism is partly due to Prevedere’s industry outlook scores, health scores, as it were, that measure the health of certain industries trending in a positive direction, which they refer to as B  to C industries—business to consumer—which include healthcare,  technology, retail  packaged goods, and the auto industry, all consumer-end focused industries which have scored positively. Based on their data, the US economy doesn’t seem to be particularly vulnerable to the global fallout incurred by Brexit.

Brexit, however, has undoubtedly rattled the stability of the world economy and volatility will probably be with us for the foreseeable future. According to Prevedere’s calculations, the economic forecast may not promise all blue skies and sunshine, but neither does it point to stormy weather.


Disclosure: The opinions expressed are those of the interviewee and not necessarily United Capital.  Interviewee is not a representative of United Capital. Investing involves risk and investors should carefully consider their own investment objectives and never rely on any single chart, graph or marketing piece to make decisions.  Content provided is intended for informational purposes only, is not a recommendation to buy or sell any securities, and should not be considered tax, legal, investment advice. Please contact your tax, legal, financial professional with questions about your specific needs and circumstances.  The information contained herein was obtained from sources believed to be reliable, however their accuracy and completeness cannot be guaranteed. All data are driven from publicly available information and has not been independently verified by United Capital.

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Steve Pomeranz: There’s a lot of talk these days about the fact that the Fed keeps predicting or keep making bad predictions about the US economy as they try to adjust interest rates to either speed up or slow down economic growth.  My guest, Danielle Marceau, is a senior economist at Prevedere.  She’s an expert of forecasting growth and the growth and contraction of the US economy. And their algorithm, so they write, has produced results with more than 85% accuracy.  So that truly interested me, and I wanted to get to talk to her.  Welcome to the show, Danielle.

Danielle Marceau: Thanks, Steve. Thanks for having me.

Steve Pomeranz: Those of us who follow policy making from the Federal Reserve, and I know you do as well, have noticed that they’ve talked about raising interest rates quite often, and they only really were able to raise them once, and they keep modifying their predictions on growth.  What’s going on there?

Danielle Marceau: Yes, I believe and what I’ve seen is that, really, they missed their opportunity to get the raise in that they had expected or wanted to get in.  That was going to be probably in early 2015; and the reason that I feel as though they’ve missed it, what we see at Prevedere is simply that they’re looking at the wrong indicators whenever they’re trying to make this decision.  The whole purpose of the Fed, their goal is to keep unemployment low, to keep unemployment high, keep employment high, keep inflation in check, keep the economy rolling, but the problem with these key variables that they focus so much attention on, like employment, is that they’re reactionary.  They’re reacting to what’s going on in the economy right now.  They aren’t helping us to see the future.  They’re not indicative of what’s coming down the line.
That’s where Prevedere, we take big data, we take all of these external factors.  What we look for are leading indicators, and so we like to focus on those things that I call it are at the forefront of the economy because, if you can think about the economy, we’re always accelerating, we’re always decelerating these inflection points, and the goal is to be able to identify those inflection points right?

Steve Pomeranz: Sure, of course.  Well, give me an idea, before you go on, just give me an idea on the data that you think the Fed is using, when you say they’re reactionary, what are they looking at?

Danielle Marceau: For example, employment.  We saw the most recent employment numbers come out—the May numbers—and everybody was in shock, right?  There were only 38,000 jobs added; most expectations were around 160,000, and so it was shocking. But the leading economic factors that we look at, at Prevedere, things like corporate profits, small business confidence, the industrial production, and also a couple proprietary Prevedere leading indicators where we’ve created them ourselves, they were actually calling for weaker jobs growth. Since 2015, about mid-year last year, a lot of these longer-term leading indicators (what we call forward lookers), they were actually suggesting that the first early portion of 2016 was going to see some weak jobs growth, and they’re actually telling us that over the next couple months, we probably aren’t going to see jobs grow as fast as we would have liked to see, around that 160,000 jobs added mark either.

Steve Pomeranz: Yes, so you mentioned corporate profits, let’s take that as an example. So we have seen that corporate profits have contracted somewhat, obviously a good size of the universe of corporations includes oils and energy type companies—and, of course, those, their profits have been order hydrocodone online from canada under pressure—when you take those out though, have your numbers shown a lessening or a declining in the growth of corporate profits or actually a contraction in corporate profits to the negative?

Danielle Marceau: When you take out the oil and the gas and a lot of the commodities, as well as the financial, if you look at mostly just consumer and service activity, you get more of a deceleration than an actual contraction. But that’s actually how we look at our data; we look at it on the year-over-year, so we can look at momentum, acceleration, deceleration. And so in spite of decelerating, it’s still telling us of decelerating conditions for the employment market as well.

Steve Pomeranz: You’re seeing a decelerating of corporate profits. Now I know you have a lot of other indicators and that only makes up one, but what do you see as the direction of the US economy, let’s say through the end of 2016?  I don’t know how far out you can actually look, but if you can go to 2017, what do you see there?

Danielle Marceau: The good news is that we don’t right now see any immediate recession, even with everything that’s coming with Brexit, the whole idea of the UK exiting the European Union. Right now, data isn’t telling us that we’re going to see recession, but what these leading indicators are telling us is that we are going to see at least the next three to five, maybe even six months, is some continued softness. So we don’t expect a huge rebound in the first, second quarter GDP growth.  Still some deceleration in jobs, some slowness, but the good early tentative signs are quite a few of these leading factors are starting to turn in a positive direction.  Now, it’s very early, so it’s suggesting that maybe around the 4th quarter of this year, we might start to see the economy start to pick up.

Steve Pomeranz: Right now, you don’t see any pick up in interest rates in terms of what the Fed can actually control, the short-term overnight rate.  You don’t see any, the Fed actually raising rates over, let’s say the rest of the year?

Danielle Marceau: I do not.

Steve Pomeranz: Okay.  Let’s filter down out from the general economy to stocks that are traded in the stock market or, rather, let’s look at individual industries.  What industries are or seem poised to do better or perhaps the leading indicators are showing some strong growth versus those that aren’t?

Danielle Marceau: Right. So we at Prevedere, we actually put out these industry outlook scores, these health scores, that tell us about the health of each of these different industries, and what we see as poised to do better over the near term is going to be things like retail.  Retail and consumer packaged goods, the auto industry, things that are B to C.  The consumers been doing the heavy lifting so far this year on keeping the US economy afloat, and it looks like they’re going to continue to do that over the next two-quarters or so. We’re not going to see that shift.  I don’t expect large, multinationals that are heavily dependent on export, industrial, or commodity businesses to start to really accelerate in the near term; it’s going to be more of those consumer-end focused ones.

Steve Pomeranz: Would that include healthcare?

Danielle Marceau: That would, yes.

Steve Pomeranz: Okay, so when you say B to C, you mean business to customer, is that what that stands for?

Danielle Marceau: Business to consumer, yes.

Steve Pomeranz: To consumer, okay, very good.  You’re saying retail looks pretty healthy.  The auto industry still looks healthy, healthcare.  What about technology or financials?

Danielle Marceau: Financials is going to— probably, when you look at, obviously, the stock market—we’re going to have a rocky path ahead, lots of volatility. So that side of the financial industry is going to be taking a bit of a hit.  Banking, I see a consumer demand for consumer loans is still going to be there, so they’ll still be able to maintain where they have been, as well.  Technology, I see technology as continuing to improve.  While it comes to a lot of what we’re seeing in the valley right now is the heavy investment in technology.  For instance, we might start to see that slow a little bit with uncertainty that is around the economy right now, but I think demand for it is still going to be there, so businesses are still going to want to innovate.  Consumers are still going to want their technology, so I do see it as remaining stable.

Steve Pomeranz: Okay, now you mentioned Brexit very briefly— unfortunately, we’re getting low on time—but Brexit, actually, we’re recording this on the day after the vote, and we’re seeing quite a lot of volatility in the market and a lot of pundits talking about how the difficulties that are going ensue in the British economy and, perhaps, even the US economy. But you mentioned you didn’t think it was going to have that much of an effect. Give us an idea of what you mean?

Danielle Marceau: I don’t think it’s going to impact the actual output of the US economy, GDP in the near term, by any means.  What it is going to do is have the emotional effect that we’re already seeing.  Stock markets are going to be volatile, uncertainty is going to be up because people are fearful of how it could potentially impact the US economy.  The good news is that a lot of these forward-looking leading indicators that I’ve talked about—so things like the small business, optimism index, corporate profits, as leading indicators, now that this information is out there, when we start to get updated data for business optimism, if that all of a sudden starts to decline because consumers are not, businesses are not optimistic about the future, then we can still look at that as a six-month leading indicator.  While we don’t know what’s going to happen with this, we will still be able to rely on these tried and true leading indicators that will help us to see how that’s going to impact us going forward.

Steve Pomeranz: I think it’s also important to remember that while the British economy is big, it’s really not that big in terms of the global economy.  I think it’s not even as big as the economy of California and Maryland put together, so let’s get some context on this.  My guess is Danielle Marceau. She’s a senior economist at Prevedere, and to find out more about the conversation, don’t forget to go to OnTheMoneyRadio.org and to sign up for our weekly update on our site where you get a weekly listing of all of the segments that we produce here on On The Money. Danielle, thank you so much for joining us.

Danielle Marceau: Thank you for having me.