Corporate CEOs aren't the only ones seeing a blank page in the first half of next year. The Federal Reserve has a similar outlook. According to various Fed officials, who spoke for the record recently and off the record for a story in Tuesday's New York Times, a gradual and modest recovery is expected to unfold in the second half of next year, not before.
"The market looks to the Fed for direction on forecasting but it's not clear the Fed is any better than market forecasts," says Mike Englund, chief economist at MMS International.
Looking at the Fed's central tendency for GDP growth presented at the time of the July semi-annual monetary policy report to Congress, "the average error going back to 1985 was 0.8 percentage point for the current year and 1.1 percentage points for the following year," Englund says.
That compares with MMS's average error of 0.6 percentage point and 1.0 percentage point, respectively. Similarly, while businesses may "have their finger on the pulse of current demand, they don't have any advantage in forecasting demand six months ahead," Englund says.
"The orders don't come in until the orders come in," says Paul Kasriel, director of research at the Northern Trust Corp in Chicago. "CEOs aren't known for their forecasting ability. Did they see the slowdown coming?" Part of the problem for corporate CEOs is they live in a year-over-year world. They look at orders, production, sales, and earnings in the current quarter compared with a year ago.
While year-over-year comparisons eliminate any seasonal pattern to business activity -- imagine if retailers compared first-quarter revenue with fourth-quarter holiday sales -- they don't exactly capture turns in the cycle.
When businesses see that orders are, let's say, unchanged in the fourth quarter from a year ago, it's not grounds for an optimistic outlook. However, no change in orders from a year ago may represent a dramatic improvement from a 20 percent year-over-year decline in the previous quarter.
Besides, after sequentially slower earnings growth since the first quarter of last year and falling profits in the last three, businesses are fresh out of optimism.
"CEOs will be cautious about calling any turn," Englund says.
The market is apt to call it long before CEOs know it's happened.
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