Economists and Fed See Peppy Economy
MANY professional economic forecasters rely on the short memory span or charity of their clients to stay in business. If they make a mistake in their predictions, the client won't remember it or will have some mercy considering the general fallibility of forecasters.
But Alan Greenspan is less fortunate. Every hint of a forecast by the chairman of the Federal Reserve is listened to avidly by financial market participants and the press. Investors act on his words; the news media record and report them.
Since the Fed reversed its monetary policy by boosting short-term interest rates by one-quarter of a percentage point on Feb. 4 and by the same amount on Tuesday, Mr. Greenspan's forecasting record has garnered renewed interest. The action is based on the assumption that the recovery is now vigorous enough and close enough to full capacity that it is time to prevent future inflation. The Fed has plenty of company.
Allen Sinai, chief economist of Lehman Brothers, New York, sees ``a solid, strong expansion, increasingly more widespread across more industries, regions, and companies. The current business cycle upturn is shaping up as one of the best in decades.''
In New York, Prudential Securities' Richard Rippe figures that the economy has taken a modified version of the mail carrier's pledge: ``Neither snow, nor sleet, nor cold, nor earthquakes, nor prior-period strength is deflecting it from the swift completion of its rounds.''
``The economy is entering 1994 like a lion,'' write Roger Brinner and David Wyss, economists with DRI/McGraw-Hill, a Lexington, Mass., consulting firm. ``Indeed, the major worry now is that the Fed may have waited too long to tighten.''
A survey this month by Blue Chip Economic Indicators of 50 forecasters found a consensus forecast for this year of 3.6 percent real growth in the output of goods and services.
Leif Olsen, an investment manager in New Canaan, Conn., predicts 4 percent real growth this year, or perhaps more. Using reports from the New York Times of Greenspan's testimony in Congress over the past five years, Mr. Olsen found that the Fed policymaker was often wrong.
In February 1989, Greenspan was warning about inflation and was committed to slowing the growth of the money supply. Three months after this tough talk, the Fed began to ease monetary policy, hoping to avoid a recession. In February 1990, he told Congress that the economy's ``weakest point may have passed'' and that the nation could expect ``moderate economic expansion'' that year. A recession, however, began in July 1990.
In February 1991, he said recovery would begin ``reasonably soon,'' but spoke of ``an unusually high degree of uncertainty'' in his forecast. An extraordinarily weak recovery did begin in April 1991. In February 1992, Greenspan said economic recovery should take hold in the second quarter. Yet it wasn't good enough to get George Bush reelected. Inflation was falling, Greenspan said, and it was only 3 percent that year.
The Fed found it necessary to ease monetary policy further in July and September. In February 1993, Greenspan signaled that the Fed saw no immediate need to raise short-term interest rates since there was enough slack in the economy. A year later - last month - the Fed started pushing up short-term rates to preempt more inflation.
Greenspan's testimony has typically been ``on the one hand and on the other hand'' - like that of most central bankers. Not relying on its own predictions, the Fed has waited in the past for economic events to prompt shifts in monetary policy.
Olsen charges Fed monetary policy with being pro-cyclical - worsening the 1990-91 slump, risking more inflation today. He says the Fed has supplied so much money to the economy in trying to speed up the recovery that now it will have difficulty cutting off growth in the demand for credit.
``Looking at the history of the execution of monetary policy, we do not have any confidence that increased inflation will be avoided,'' Olsen says. But he is referring to relatively modest 3 to 4 percent inflation. Inflation can pick up before the economy fully utilizes its labor and industrial capacity, he notes.
One bright note: Olsen says he expects more vigorous growth in employment this spring.