Economists Split on Economic Predictions, Analysis

By Robert D. Hershey Jr., Ny Times | THE JOURNAL RECORD, March 8, 1988 | Go to article overview

Economists Split on Economic Predictions, Analysis


Robert D. Hershey Jr., Ny Times, THE JOURNAL RECORD


WASHINGTON - Rarely, if ever, have prospects for the nation's economy been scrutinized so closely as they have since October's stock market plunge. Yet rarely has it been harder, given the contradictory mixture of recent statistics, to draw conclusions with confidence.

The mainstream of professional opinion believes the chance of an imminent recession continues to shrink. For example, only a quarter of the 200 responding members of the National Association of Business Economists now expect a business contraction in 1988, half as many as predicted a recession in November.

``My nervousness level has gone down,'' said Kathleen B. Cooper, chief economist for the Security Pacific National Bank as she released the group's quarterly poll last week.

Yet, as has been proved so often in economic forecasting, the consensus can be wildly wrong despite the elaborate, mathematical models of the economy and the ever-bigger computers being harnessed to the task.

While such sophistication may have fooled some outside the profession into believing that economics is an exact science, most insiders know better. When confronted with the fact that the same data often result in decidedly different forecasts, even the most diehard economist will acknowledge that the craft has limitations.

This shows that economics, in the end, is basically about people and their often unpredictable reactions to events. What follows is a look at three well-known economists and the methods by which they have reached their varied forecasts.

David A. Levine: Expansion View Tied to Economic History David A. Levine, chief economist at Sanford C. Bernstein & Co., a New York investment firm, has been expecting economic acceleration for so long that he now winces instead of laughs when his friends compare him to the airport manager who still keeps the landing lights on for the return of Amelia Earhart.

But he remains undaunted, predicting that the economy will expand during the rest of this year at an annual rate of between 5 percent and 7 percent, about triple the consensus and more than twice as fast as projected by the Reagan administration.

After a number of aborted attempts, the elements of faster expansion are again well aligned, Levine believes.

``Now I think we're ready to go,'' he said.

Levine's analysis rests heavily on economic history and on a handful of propositions derived from it. There is ample precedent for 6 percent growth, he has found, asserting also that the chance of a recession is almost zero so long as the Federal Reserve can avoid tightening its monetary policy and thus prevent interest rates from rising.

For about one-quarter of the period since the Korean War, he notes, the economy has grown at a rate of 5 1/2 percent or faster. Another one-quarter of the time the economy has been contracting.

Given that this means that the economy has been in a boom or a bust half the time during this period, Levine argues that his prediction of a boom is not so wild.

Big swings, in his view, are mostly the result of changes in how much individuals and companies spend on new houses, cars and factories - decisions that ``tend to aggravate the prevailing economic tempo.''

This produces gyrations in inventories of unsold goods, but Levine maintains that even an inventory buildup as big as the one that occurred in the final three months of 1987 is not a sufficient condition for a recession. As evidence, he cites the early part of last year: inventories swelled following the automobile sales binge of late 1986 - produced by people trying to beat the new tax law, which eliminated the deductibility of sales taxes and interest payments.

``People understood it was temporary,'' Levine says, ``and if producers don't think it's permanent, they don't react'' by cutting output. …

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