No doom and gloom for this forecaster

Jim O'Sullivan, considered one of the most accurate market predictors in America, says the economy will be fine.

By MSN Money Partner Feb 11, 2014 3:10PM

Image: Crystal ball (© Brand X Pictures/Jupiterimages)By Rex Nutting, MarketWatch

The most accurate forecaster in America over the past 10 years has a shocking prediction for this year: The economy will be fine.

Not great, not terrible, someplace in the middle. Fine.

While other forecasters have been quietly marking down their expectations for growth in the first quarter after a series of disappointing numbers were released, Jim O'Sullivan, chief U.S. economist for High Frequency Economics, says he's not worried about a slowdown.

"I don't see where it's coming from," O'Sullivan said of a possible slump.

O'Sullivan won his record 12th MarketWatch Forecaster of the Month award in January, just a month after he was crowned with his third-straight Forecaster of the Year. O'Sullivan has won the monthly award two of the past three months, and three of the past six.

O'Sullivan makes his living building up predictions about the economy from the bottom up: So much income plus so much spending plus so much investment equals so much growth.

And the pieces of the puzzle so far are telling O'Sullivan that the economy will probably grow at a 3.3 percent pace this year, up from the 2.7 percent growth recorded from the end of 2012 to the end of 2013. That forecast is the highest in the monthly Blue Chip Economic Survey, but it's not too far above the 2.9 percent median forecast.

O'Sullivan is the most bullish, but there are plenty of other bulls out there.

"The clearest change [from 2013] is fading fiscal drag," he said. The tax hikes and spending cuts in early 2013 cut about 1.5 percentage points from growth last year, which means that without the budget battles in Washington, the economy might have grown more than 4 percent in 2013.

The fiscal drag will fade to about 0.5 percentage points of gross domestic product this year. Inventory building and home building might provide less boost to growth in 2014 than in 2013, but O'Sullivan figures the consumer sector should pick up its spending to compensate.

The weak reports for January do trouble him a bit, but he'd have to see further evidence of slowing before he'd change his forecast. It takes more than one month's worth of data to shake his confidence.

The most troubling piece of weak January data was the sharp drop in the Institute for Supply Management's manufacturing index, which is not typically affected much by cold or snowy weather.

But his other trend-setting indicators -- jobless claims, the nonmanufacturing ISM -- were still healthy in January. He figures job growth will rebound to its trend of around 190,000 per month.

"There's no case for a sudden slamming on the brakes," he said.

O'Sullivan figures personal consumption could accelerate from 2.3 percent growth in 2013 to close to 3 percent this year without a sharp drop in the savings rate.

Here's how he builds that spending forecast: With total hours worked rising at 2 percent, and hourly wages up about 2 percent, nominal labor compensation is rising at about a 4 percent annual rate. Subtract the 1.5 percent inflation, and you get real earned income growth of about 2.5 percent.

Factor in a little bit of spending due to the wealth effect and you could easily see 3 percent growth in consumption, particularly if wages begin to rise a little faster as the labor market tightens.

O'Sullivan believes the Bureau of Economic Analysis may have undercounted consumption in 2013. Spending, especially on services, is hard to track in real time, but income is relatively easy to measure.

Economic growth as measured from the income side has been a little stronger than growth measured from the spending side (3.1 percent through the third quarter vs. 2 percent). He figures the spending figures for 2013 will be revised up during the annual benchmark revision.

In the January contest, O'Sullivan hit three of the numbers on the nose, and his forecasts were among the 10 most accurate on four others.

The runners up in the January contest were Peter Morici of the University of Maryland, Dean Maki's team at Barclays, Jan Hatzius' team at Goldman Sachs and Neal Soss' team at Credit Suisse.

The median forecasts that MarketWatch publishes in the economic calendar come from the projections of the 15 forecasters who have scored the highest in our contest over the past 12 months, as well as the forecasts of the most recent winner. See our economic calendar and consensus forecast.

Over the past 12 months, the top forecasters are, in order: Jim O'Sullivan of High Frequency Economics, Michael Feroli of J.P. Morgan, Brian Jones of Société Générale, Paul Edelstein of IHS Global Insight, Spencer Staples of EconAlpha, Stephen Stanley of Pierpont Securities, Jan Hatzius' team at Goldman Sachs, Avery Shenfeld of CIBC, Brian Wesbury and Robert Stein of First Trust, Maury Harris’s team at UBS, Ted Wieseman of Morgan Stanley, Paul Ashworth of Capital Economics, Dean Maki's team at Barclays, Peter D'Antonio at Citigroup and Ray Stone of Stone & McCarthy Research.

More from MarketWatch

Feb 11, 2014 5:44PM
The percentage of Americans working is at the lowest level since 1980. The number of Americans on public assistance is at a record high. Wall Street is the biggest welfare recipient at 65 billion per MONTH. The food stamp program costs 74 billion per YEAR by comparison. If things are so rosy why does Wall Street need public assistance? First time home buyers are at a record low. College grads living at home with mom and dad are at a record high. Interest rate at record lows. Is this what someone would call a "fine" economy? And the final straw? The number of babies being born is too low to make a good economy possible. Everyone in the real world knows the economy is bad right now. Growing? Shrinking? Who cares? It is bad. Period.
Feb 11, 2014 5:51PM
Did O' Sullivan forecast a slowdown in 2007? If not (that is what I'm betting) why believe him now?
Feb 11, 2014 4:42PM
Apparently, O'Sullivan is cool with nearly TWO QUADRILLION in derivatives debt. Do the math... on $50-$60 TRILLION in GDP, we would need three times our current annual budget just to cover the interest at the CURRENT rate. That's zero growth for centuries. When do we get rid of these boobs?
Feb 12, 2014 2:19AM
The Economy SUCKS and there are only part-time JOBS !!!!!!!!!  Just check out Walmart's Quarterly Earnings Report on Feb. 20  !!!!!!!!
Feb 11, 2014 7:15PM
In baseball you play the percentages. I'm betting that Sullivan will be wrong this time around. He can't win every time. 
Feb 11, 2014 8:58PM
"Jim O'Sullivan, chief U.S. economist for High Frequency Economics, says he's not worried about a slowdown. "I don't see where it's coming from," O'Sullivan said of a possible slump."

Then you aren't looking. From the effects of the coming rise in Japan's sale'stax to the high inventory levels shown in the GDP numbers. Not to mention all Big Banks are bad Banks due to massive $500-700Trillion in Scam Banking Derivatives.

Europe with chronic 12% plus unemployment and the clear trend of lower Revenues here in America but higher profits due to continually cuts to real workers but bonuses to anyone else.

Don't mistake a Globally Fed induced Stock Market Rally to a great economy.
Feb 11, 2014 5:06PM
Warren B. has warned about derivatives and yet he uses them himself.  Most of those derivatives will expire worthless, but they are still worrisome.  The story about how 'U.S. banks can match China's for corruption' is what we should all be focusing on, along with the mil. industrial complex's oligarchy here.
Feb 11, 2014 5:08PM
And, the 85 billionaires who own as much as half of the world's wealth.  Who's worth a billion anyway?
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