Pinning the tail on the GNP -- economists miss Forecasters more pessimistic, but no '85 recession, they say
The US economy continues to fool forecasters. The rebound from the economy's sluggish 0.7 percent growth rate in the first quarter now appears likely to be less robust than most analysts had expected. Most predictions have ``fallen far short of the mark,'' says Jerry Jasinowski, chief economist for the National Association of Manufacturers (NAM).
As a result, forecasters are busy revising down their estimates of how 1985 economic growth will compare to 1984's record. Thus they still do not see a recession this year.
Since March, the 50 economists surveyed monthly by the newsletter ``Blue Chip Economic Indicators'' have cut their average prediction for inflation-adjusted economic growth in 1985 from 3.9 percent to 2.9 percent.
That drop is ``one of the sharpest declines in the consensus rate of growth for a three-month time span'' since 1976, says Robert J. Eggert, editor of the Sedona, Ariz.-based publication.
Last week's spate of statistics on industrial production, retail sales, and capital-spending plans ``simply strengthen that pessimistic view,'' says Cynthia Latta, senior economist at Data Resources Inc., a forecasting firm.
As a rule of thumb, economists say a growth rate of 3 percent or more is needed to absorb new entrants into the labor force and to keep unemployment from rising. Several quarters of economic growth below 3 percent can produce a ``growth recession.'' That term describes a situation where economic output is growing at a snail's pace while the unemployment rate climbs.
The expectation that economic growth for all of 1985 will come in under 3 percent not only darkens the outlook for unemployment but also for corporate profits and the federal budget deficit, analysts say.
International Business Machines (IBM) president John F. Akers last week cited the US economy's ``disappointing economic performance'' as a key reason that IBM would report lower nine-month earnings compared with last year. The IBM announcement sent stock prices tumbling for two days before they rebounded Friday.
Meanwhile, David Stockman, director of the government's Office of Management and Budget (OMB), warned that if economic conditions develop the way the Blue Chip forecasters estimate, they could add $50 billion to $70 billion to the federal budget deficit in budget year 1988. That's compared to the deficit which would result from the administration's more optimistic economic assumptions.
Forecasters offer a variety of explanations for why the economy has been weaker than expected. For one thing, the NAM's Mr. Jasinowski says, ``business misjudged the extent of consumer demand,'' and saw their inventories of unsold goods rise as a result. To bring stocks back into line, firms cut production.
So far, he notes, firms have not been able to liquidate the inventory overhang. ``Inventory decumulation will continue in the second and third quarters,'' Jasinowski argues, reducing firms' need to produce new goods.
Another key drag on the economy, DRI economist Latta says, is a ``disastrous'' trade situation in which the dollar's high value allows foreign producers to siphon off a large part of the demand for manufactured goods from US firms and consumers. One sign of the impact of foreign competition is the fact that industrial production in the US fell 0.1 percent in May, the second straight monthly decline, the Federal Reserve Board reported last week. And the output of business equipment fell in May for the fifth month in a row.
Meanwhile, the government announced that US firms have trimmed plans to invest in new equipment. A survey conducted in April and May found firms would boost spending 6.2 percent compared with last year. A January to March survey indicated spending would be up 7.3 percent after inflation. The biggest spending hikes will be made by manufacturers who expected to spend 10 percent more this year on new equipment in what analysts see as a bid to become more globally competitive.
Despite these negative factors, most economists do not expect a recession in 1985.
One reason is that consumers are still spending -- although at a subdued rate. Retail sales in May dropped 0.8 percent, preliminary figures show, but April sales were revised up to a hefty 2.4 percent. Car sales in early June were above depressed year-earlier levels but below April's and May's pace.
Forecaster pessimism also is moderated by the recent drop in interest rates as the Federal Reserve acts to keep the economy moving. Rates also have dropped because of the slow pace of economic growth, analysts note. Lower rates already have helped the housing industry and also are expected to aid auto sales.
If next week's GNP estimate for the second quarter is weak, ``then I would see a trend toward further [credit-market] easing,'' by the Fed, says Ronald Utt, deputy chief economist at the US Chamber of Commerce.
So far, a more accommodative monetary policy has not lead to inflationary pressures, although some forecasters worry it might. In May producer prices for finished goods rose 0.2 percent. If the May rate persisted for a year it would translate into a 2.5 percent annual pace.
One factor holding down inflation is the influx of lower-priced foreign goods. ``I dont think inflation will get any better. It may worsen slightly. But I don't think the increase will be severe,'' DRI economist Latta says.