I’ve always told my five children that it is better to say nothing than to say something foolish. That’s the advice I would give the members of the FOMC. My hunch is that FRB-NY President Bill Dudley already must regret telling an audience on January 15 that the U.S. economy is on “sound footing” and better able to “withstand downside shocks.”

He also said that he is “very pleased by how well” the Fed’s policy tools are working.

Two weeks later, the latest releases for durable goods orders and GDP suggest that the economy’s footing isn’t so solid.

Let’s reassess our own outlook for the economy based on the latest batch of somewhat unsettling data:
 
(1) GDP: Growth. We are forecasting that real GDP will increase 2.3% on a Q4-Q4 basis this year, up from 1.8% last year. On this basis, real GDP has been growing around 2.0% since mid-2010 (Fig. 11). Historically, 2.0% has been the “stall speed,” which inevitably was followed by a recession. That hasn’t happened so far, though real GDP growth was back below this speed at 1.8% last quarter.
 
We are counting on fiscal stimulus to boost economic growth this year. Government spending in GDP was mostly a drag on economic growth during the current economic expansion. (The government’s entitlement programs redistribute income and are not directly reflected in GDP.) The recent budget deal in Washington suggests federal government spending will boost growth. The same is likely at the state and local government level, though some of the oil-producing states may have to cut their spending as their revenues from their oil industries dry up.
 
(2) GDP: Consumer & housing. We also are forecasting that real consumer spending will grow around 3% this year, the same as last year. Employment growth should remain solid. Wage gains may remain relatively low around 2.5%, but still outpace consumer prices, especially if gasoline prices remain low. Consumer spending did slow during Q4 to 2.2% on a seasonally adjusted annual rate (saar) from 3.0% during the previous quarter. However, some of that weakness was attributable to unseasonably warm weather, which depressed spending on energy nondurables and services.
 
Another positive contributor to real GDP this year should be residential investment spending. Rising household formation should continue to boost housing construction. Multifamily starts have been booming as landlords build more units because rents are rising so rapidly. High rents should stimulate more first-time home buying. In our scenario, mortgage rates are likely to remain affordably low all year.
 
(3) GDP: Capital spending & orders. Last week’s big shocker was the 4.3% plunge in nondefense capital goods orders excluding civilian aircraft. That doesn’t augur well for capital spending, which fell 1.8% (saar) in Q4’s real GDP, the first negative contribution from this component in 13 quarters. It could continue to weigh on growth this year as capital spending is slashed by energy and mining companies around the world. In addition, the strong dollar is depressing all exports, including those of capital goods exporters.
 
(4) GDP: Trade. During Q4, real final sales rose 1.2% (saar), exceeding the 0.7% increase in real GDP. The problem is that exports fell 2.5% while imports rose 1.1%. The strong dollar is certainly depressing the former while boosting the latter. In addition, the global economic slowdown has weighed on U.S. exports. Trade is likely to continue to be a negative contributor to U.S. growth this year. However, that means that the U.S. should be an important source of growth for the rest of the world.

Dr. Ed Yardeni is the President of Yardeni Research, Inc., a provider of independent global investment strategy research. To read more of his blogs, CLICK HERE NOW.