Rating the Consensus and Bureau 1992 Forecasts

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This analysis presents a rating of the accuracy of the Blue Chip median consensus forecasts and the Bureau of Business and Economic Research forecasts for 1992 and provides a look back at key economic trends that will likely continue into 1993. The 1992 economy contained a combination of contradictory economic events, roller-coaster emotions, and a better-than-expected jump to a 4.8 percent annual rate of growth for the fourth quarter of 1992. Deflationary price pressures kept commodity and financial markets off balance and led to the lowest long-term interest rates in the last 20 years. Moreover, in the midst of all the handwringing over the federal deficit, the deficit as a percentage of GNP actually fell in 1992, and interest rates dropped steadily throughout the year.

As output began to rise, the nation's unemployment rate also rose, upsetting the traditional view of the typical economic recovery but reflecting the slow reaction most businesses made to the 1990-91 recession. Businesses finally responded in 1992 and moved quickly to improve their balance sheets by restructuring their debt and cutting labor costs. Consumers continued to defy most forecasts by spending at record levels in 1992. Other economic trends in 1992 involved a substantial rise in both labor productivity (a 20-year high) and corporate profits and a reduction in the rate of growth in the nation's employment cost index, which includes both wages and benefits.

One surprise in 1992 was the severity of the slowdown of the Japanese economy. The Japanese economy dipped into recession in spite of a huge trade surplus ($78 billion) and a low unemployment rate (2.2 percent). The U.S. economy, meanwhile, recorded positive economic growth despite a trade deficit ($37 billion) and high unemployment (7.2 percent). However, both economies saw short-term interest rates cut in half and the emergence of political pressure for an economic stimulus package. Most of the debate in both countries concerns the familiar Keynesian pump-priming through deficit spending and increased public investment. In Japan the government ran a budget surplus of $20 billion, a drain on the economy, while in the U.S. the government had a budget deficit of $290 billion, an injection into the economy. The economic slowdown in Japan and the economic recovery in the U.S. can be attributed somewhat to government expenditure policies. Clearly, the primary focus of each country will be on how to raise aggregate domestic demand to re-ignite economic growth without fueling the fires of inflation. Therein lies the challenge for the U.S. and its global competitors in 1993.

Economic Growth

Consensus and Bureau Forecasts: The median consensus forecasters began the year by scaling back their estimates of first-half growth to only 1.2 percent with a pick-up to just above 3.0 for the second half. The Bureau's forecast was in agreement with the consensus forecast with economic growth for 1991 pegged at 1.6 percent. While the consensus forecast emphasized rising consumer confidence, the Bureau forecast foresaw credit cautions and slower export growth as barriers to achieving higher growth rates.

Actual: Election-year political stalemate and jittery consumers kept the economy on a bumpy recovery path. After a good start of 2.9 percent growth during the first quarter, the growth rate dipped to 1.5 percent in the second quarter. During the second half of 1992, economic growth rose to 3.4 percent in the third quarter and 3.8 percent in the fourth quarter, slightly above the consensus and Bureau estimates. Preliminary estimates show real economic growth advanced 2.1 percent above 1991, only 0.5 percent above the consensus and Bureau forecasts of 1.6 percent.

The consensus forecast correctly predicted that the recession had ended in March 1991 but underestimated the rebound during the first half of 1992. The Bureau, meanwhile, correctly anticipated the near-negative growth rate (0. …