Optimistic Forecasters Play Down Economic Troubles
Uchitelle, Louis, THE JOURNAL RECORD
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 this recession.''
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 forecasting trends.
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 top management.
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. …