Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: MONDAY, February 18, 1991 TAG: 9102180045
SECTION: NATIONAL/INTERNATIONAL PAGE: A-10 EDITION: METRO
SOURCE: The New York Times
DATELINE: LENGTH: Long
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 and 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. The Fed has been reducing the funds rate by a quarter of a point at a time since last fall, and on Feb. 1 drove down the rate by half a percentage point, an unusually large amount, to its current level of about 6 percent.
"The thing that really turned the corner in terms of forecasting optimism was that Feb. 1 move by the Fed," said Stephen Roach, a senior economist at Morgan Stanley & Co.
But some economists argue that even if interest rates get low enough to revive lending, the recession still might not end this summer, or even this year, for that matter.
They cite problems such as the weak real estate and construction markets, a sharp decline in consumer spending in recent weeks and the growing budget deficit, which makes the government unwilling to spend for public works and other projects that stimulate economic activity.
"My feeling is that the recession will be deeper and will last longer than the consensus forecast believes," said Edward Hyman Jr., a vice chairman of the investment house of C.J. Lawrence, Morgan Grenfell Inc.
By contrast, the consensus forecast, which is shared by the Bush administration, draws heavily on past experience. The past teaches that recessions usually end when falling interest rates revive consumer spending and inventories of unsold goods are slim.
Low inventories mean that when spending starts to grow again, production can be quickly stepped up and people rehired, without having to wait for stockpiled merchandise to be sold.
by CNB