No Recession Yet, Says One Economist
MICHAEL KERAN says he's not ready ``to throw in the towel yet'' on a recession. The chief economist for the Prudential Insurance Company of America is decidedly in the minority among economic forecasters. Blue Chip Economic Indicators, based in Sedona, Ariz., just changed the banner on its newsletter from orange to red, meaning that the prevailing opinion among the 50 economists surveyed each month by editor Robert Eggert now holds that the economy has already, or is about to, slip into recession. Their average forecast sees real national output contracting at an annualized rate of 0.8 percent in the fourth quarter of this year and 0.6 percent in the first quarter of 1991.
``That the economy is in recession is difficult to deny,'' state Roger Brinner and David Wyss, two economists with DRI/McGraw-Hill, an economic consulting firm.
Well, Mr. Keran does deny it. Whereas the DRI economists say a recession may have begun as early as August, when oil prices jumped, or as late as October, when consumer spending plunged, Keran doesn't anticipate a real recession until mid-1991.
In that long Blue Chip list of forecasters, Keran is the most optimistic of all for this year. ``The numbers out there now certainly don't support my view,'' he admits.
Keran refers to such statistics as those released this week for industrial production (down 0.8 percent in October) or retail sales (up only 0.1 percent in October, not accounting for inflation). The numbers prompted somber comments from economists. Gordon Richards, National Association of Manufacturers, was quoted as saying: ``The evidence of a recession is now unambiguous.''
So is Keran whistling past the graveyard?
One factor giving him confidence is a remarkably accurate forecasting record over the past few years. Using an econometric model which relies heavily on oil prices and interest rates, he keeps cranking out predictions which prove - eventually - right.
The second is the unreliability of monthly and even quarterly statistics. They are constantly being revised. Keran's forecasts of 1989 and 1990 real gross national product (GNP), the output of goods and services, looked mediocre until the government's numbers were revised in July.
``Last year I was right,'' he says with a chuckle. ``We will see about this year.''
But that ``rightness,'' if it is so, may not be shown until the annual revision of GNP statistics next July. Keran figures there has been a major increase in the productivity of labor which hasn't shown up in newly released statistics. Faced with higher energy bills, businessmen have trimmed costs by laying off employees and insisting on higher productivity. The early industrial production numbers, for example, are based to a considerable extent on hours worked. Real output numbers arrive later and will show more growth. So industrial output numbers will be revised upward. Last year, Keran had counted on them being revised downward, as they were.
Keran does have some relatively optimistic company. Yesterday, three forecasters at the University of Michigan, Saul Hymans, Joan Crary, and Janet Wolfe, said real GNP would decline at an annual rate of 0.6 percent in the current quarter, but grow at a 1 percent rate in the first quarter of 1991. So it won't be a recession, they say.
``When sages look back on this period, they will in all likelihood judge it either to have been a mild recession or a near miss,'' the trio stated at a meeting in Ann Arbor, Mich. ``And it won't really matter which: we're probably all too hung up on an issue that's more semantic than substantive.''
Keran also doesn't anticipate a sharp slump. That's because he expects the Federal Reserve to ride to the rescue with an aggressive easing of monetary policy as soon as it sees a recession.
``The Fed will bail us out,'' he says. But it will take six to nine months for that easier policy to boost real output. If the Fed, at its meeting earlier this week, decided to ease sharply, it might alleviate or prevent a recession next year. If it didn't, unemployment could rise to 6.8 percent by the fourth quarter of 1991. The economy could run flat with no growth until mid-1992. ``It would be bad timing for the [presidential] election,'' says Keran.