Don’t let the Federal Reserve’s rose-colored glasses fool you

By Dian Vujovich

No doubt about it, it’s been a plop plop fizz fizz Alka-Seltzer kind of year. Between market volatility at home and around the globe, debt problems, seemingly immature bullies running Congress, the average wage-earner’s income diving as their day-to-day living costs are rising, CEOs making more, the numbers of millionaires growing etc. etc., etc., the best anyone can do is to beware of anyone projecting that things are just hunky-dory economically. Even if those projections come from the Federal Reserve.

Two years ago the Federal Reserve began publishing its forecasts for the current year and out two years. Figures complied include stats on things like our GDP, unemployment and inflation. While those projections may sound like a good thing, it turns out the Fed isn’t so hot at making accurate ones.

To be fair, that’s not a sin. Like anyone of us who has been in the process of creating a nest egg for use sometime in the future knows first-hand, putting so much money away every month or every year and figuring our plan will equal such-and-such later on soon realizes that our projections don’t always pay off as planned.

And so it has been with the Fed.

Lance Roberts, of Streettalk Live, wrote a piece titled “The Fed and Goldilocks Economic Forecasting”. His piece looks at the Fed’s projections on GDP, unemployment and inflation. He thinks that we’re in a slow-growth economy and writes: “The simple fact is that when an economy requires nearly $5 of debt to provide $1 of economic growth, the engine of prosperity is broken.”

Looking only at the Fed’s GDP forecasts for 2013 and 2014 has been revised downwards, Roberts sees a recession in 2013 and a rebound in 2014.

I happen to agree in part with Roberts.

That said, two things investors would be wise to keep in mind going forward are: One, projections are just that—projections—and aren’t carved in granite.  Second, your own investment portfolio can grow even when the markets are volatile and the overall economy is in the dumps.

Back to the Fed’s GDP projections. Below are two charts, one from dshort.com and the other streettalklive.com, showing the Fed’s GDP projections and recent realizations.

To read Roberts’ full story visit: http://tinyurl.com/82v73nk.