A majority of the nation's forecasters are insisting that the
current recession will end by August, basing their optimism on the
behavior of past recessions.
By their own acknowledgment, however, the forecasters are
playing down the special troubling features of this recession that
could prove them wrong.
The big rise in stock prices in recent weeks has reinforced the
forecasters' view that this recession, the ninth since World War II,
will be among the shortest, lasting less than a year.
Blue Chip Economic Indicators, which polls 50 prominent
forecasters each month, shows that their consensus prediction in
February is for healthy economic growth beginning in the third
quarter - assuming the Persian Gulf war ends by April 1.
``People are behaving as if there is something objective out
there making the Dow Jones industrial average go up, but it's just
animal spirits,'' said Paul Samuelson, the Nobel laureate in
economic science. ``The forecasters are taking the average length of
the four mildest recessions since World War II and assigning it to
By sheer chance, the optimists may turn out to be correct. In
fact, the consensus forecast has had an uncanny knack for predicting
the beginning of past recoveries. But Samuelson and other
economists contend that the outcome of this recession is harder than
others to forecast - and perhaps is unpredictable - because it
departs radically from the postwar norm in three main features:
- The huge quantities of unpaid bank loans.
- The resulting crisis for the nation's banks.
- The cutback in lending.
Economists say they do not know whether the lending cutback
stems mainly from the reluctance of banks to lend and risk more
problem loans or from the reluctance of consumers and businesses to
borrow and spend during hard times.
Whatever the dynamics, the economy cannot move from recession to
recovery without a revival of lending and the increased spending
that loans make possible.
``We know that the credit stringency problem exists, but it is
nearly impossible to anticipate whether it is a major obstacle to
recovery or a third-order problem,'' said Stephen McNees, an
economist at the Federal Reserve Bank of Boston, who has studied
The nation's forecasters, acknowledging this blind spot, issue
their forecasts anyway, saying in effect that they have no choice.
Most are economists employed at brokerage houses, banks and
corporations, and their forecasts are churned out for customers and
Investment and business decisions are hard to make without an
educated guess about the economy's future, and the forecasters
provide this service. The problem is that their widely published
predictions help to shape not only a customer's view of the economy,
but also the public's.
Edward Yardeni, chief economist at Prudential-Bache Securities
Inc., the investment house, is among the optimists, and his weekly
forecasts are mailed to many in the media as well as to investors.
``My ultimate job is to forecast the economy's impact on the
stock and bond markets, to help people make money,'' he said. ``So
far, I have stressed that the Federal Reserve is committed to
getting us out of a recession by lowering interest rates, and that
drives up stock prices.
``What I have not discussed is whether the Fed's commitment will
work. If the Fed gets the federal funds rate down to 5 percent and
the economy is not only not improving but still deteriorating, then
I'll switch my forecast and we'll get out of stocks. But I will
have served my customers well.''
The federal funds rate, the interest rate at which banks lend
money to each other, determines the level of many other short-term
rates, including interest rates for auto loans and many mortgages. …