Side With the Optimists on Economy in ’87
Like blindfolded children pinning tails on a donkey, economists for the major business and financial firms try every year at this time to get a handle on the vast $4-trillion U.S. economy and predict its course for the year ahead.
It’s a seasonal diversion, along with champagne, paper hats and the NFL playoffs. And this year seems more diverting than most, with forecasts dividing between rising prosperity and disaster.
Most to be sure see little change, says Robert Eggert, who collects the predictions of 50 economists for his Blue Chip Economic Indicators newsletter.
The average forecast says 1987 will be much like 1986, with the value of all the economy’s goods and services--what is called the gross national product--growing 2.5%. But the range of predictions is extraordinarily wide.
Wide Range of Forecasts
The most optimistic among the economists project 4% growth in GNP, while the most pessimistic think the economy will sink into recession--that GNP will decline in value or, at best, show no growth at all next year.
In sheer money terms, the difference between 4% growth and 0% is $169.36 billion. That’s enough to pay annual wages on 8.46 million additional jobs, or more new jobs than there are unemployed Americans today.
So which prediction is closer to the mark has important implications for your well-being in the coming year, whether you’re a job-seeker, an investor or just an interested wage earner (better times mean pay hikes, bad times mean cutbacks.)
But what are you to think when two diametrically opposed predictions come from within different branches of the same company?
At Prudential Insurance Co. in Newark, N.J., economist Michael Keran believes that the economy will grow 3.9%, while over at the insurance company’s Prudential-Bache Securities subsidiary on New York’s Wall Street, economists Deborah Johnson and Edward Yardeni foresee the economy falling into recession in the first two quarters and recovering weakly after that. (Newark and New York read each other’s reports, says Keran, but nobody at the company says they must agree.)
Industry in Better Shape
Which side should you believe and why? On balance, you’re better off going with the optimists, if only because they seem to have noticed something important in the U.S. economy that the pessimists have missed: namely that U.S. industry is in better shape than many people have been giving it credit for.
The pessimists on the other hand tend to be looking in the rear view mirror, saying that because economic growth in 1986 was no great shakes, it can’t possibly be better in 1987. Their chief worry is that the consumer is tapped out.
Spending by U.S. consumers for everything from cars and food to houses and diamond rings amounts to $2.8 billion--two-thirds of GNP--and was the most important factor supporting economic growth in the last two years. But lately growth in spending has outrun growth in income and the consumer has been borrowing heavily to keep up the pace.
If that spending now slows down, as seems inevitable to almost everybody, despite the new tax law’s lower withholding, can anything else become the economy’s driving force?
Yes, say the optimists, a turnaround in trade because U.S. imports will be lower and U.S. exports will be higher.
The flood of foreign goods held back U.S. production and U.S. economic growth in 1986, notes David Bostian of Bostian Research, but that won’t happen next year for two reasons.
One is that the lower value of the U.S. dollar against some world currencies makes foreign goods more expensive here. But another is that U.S. industry is in better shape.
American manufacturers overall have improved their ability to turn out more goods at lower costs--have increased their productivity, that is--at least 17% since 1978. But declining productivity in office work and services has obscured that improvement.
Now, with currency changes giving them a helping hand in the home market and their own cost competitiveness helping in foreign markets, U.S. manufacturers could begin to turn the massive trade deficit around.
It won’t have to be dramatic. Economist Norman Robertson of Pittsburgh’s Mellon Bank, who is no great optimist on the year ahead, foresees a $30-billion reduction in the U.S. trade deficit, to about $145 billion from $175 billion.
That doesn’t sound like a miracle, but think again. Remember that $30 billion is enough to create 1.5 million jobs paying $20,000 a year. That no doubt would make all the economists feel very optimistic a year from now when they get around to their predictions for 1988. Maybe that would be the time to start worrying.
