Mixed Signals Make Forecasting Tough
This is the time of year when economists crank up their mathematical models, activate their computers or simply peer into their crystal balls to aid employers, clients or whomever in planning for the year ahead.
Rare is the time when forecasting is easy, but this juncture seems more difficult to interpret than most. This is because of the plethora of conflicting information that dots the economic scene.
On the positive side, the U.S. economy has just reached another milestone. The economic expansion celebrated its seventh birthday a few days ago.
This is no small accomplishment. The average peacetime expansion has lasted less than three years during the postwar era. Indeed, even when considering wartime upswings, this one rates ahead of all others, except the 106-month expansion of the 1960s, which included the Vietnam War period.
At the same time, however, this should make one cautious when looking ahead.
For one thing, trees do not grow to the sky and people do not live forever; sooner or later, we are bound to have another economy-wide recession.
For another, there is a belief in some quarters that the Reagan Administration’s wartime-like buildup of our defense capabilities was one reason for the longevity of this expansion. If that is the case, a major prop under this upswing has already been removed because of the cuts in defense outlays as part of Washington’s efforts to shrink its budget deficit.
One favorable sign comes from inflation. Prices for a wide variety of goods at the consumer, wholesale and basic commodity levels are either steady or are falling in response to weakened demands and the Federal Reserve’s tight money policy.
To be sure, businessmen would like to boost prices; their costs are rising--especially the benefits that they must pay to their employees. However, the consumer has learned to just say no to higher prices. This has forced businessmen to suffer lower profits and ask their workers to shoulder higher health-care costs.
These trends are contributing to the turbulent economic scene. Part of the rise in health-care costs stems from the hiring of additional workers. Other service industries are adding to payrolls as well, including local governments, computer applications and fast-food operations. By their nature these are labor intensive, and most allow people to work part time.
Thus, the ever-expanding service sector is keeping the overall employment statistics rising and the jobless rate down--even as many goods-producing industries are retrenching and profits are falling.
Declining earnings do not bode well for economic growth. Lower profits mean less money available to business for spending on new machinery and equipment, research and development--and new workers. Eventually this is bound to affect services.
The growing use of computers has produced another plus--better inventory control. Unwanted stockpiles are usually part and parcel of recessions; firms belatedly discover that they have too many goods on hand, and their order cutbacks usually ripple out to produce a general decline in business.
This time around, most manufacturers and wholesalers seem to be running fairly comfortable inventory-sales ratios. However, retailers in general appear to have too many goods on hand--especially in the key automobile sector.
Consumers always make a difference in the outlook, because they account for two of every three dollars that make up the gross national product. The high level of employment, combined with satisfied demands from the long expansion and anxious retailers, has produced a low-inflation environment that helps make consumers’ dollars go further. Confidence levels remain high--at least where people still have jobs.
But the goods that people are buying tend to be either small ticket in nature or imports. New home construction is running at its lowest level since the last recession, while new car sales are in similar shape.
This has produced cutbacks in the goods-producing sector. Factory payrolls alone fell 140,000 between March and October, putting them no higher than the year before. Other layoffs are developing because of the flattening in exports and the decline in spending for office buildings, factories and shopping centers.
In two areas spending is rising. Activity is being helped by the influx of orders for new commercial aircraft at Boeing and McDonnell Douglas. And spending by Washington, as well as by states and local governments, to help rebuild from two disasters--the earthquake on the West Coast and Hurricane Hugo in the East--is already providing a boost to these areas and to the construction industry.
Perhaps the biggest factor in the outlook will be the state of the financial markets. The stock market is clearly jumpy, having plunged sharply twice in the past two years. The use of computers and program trading notwithstanding, investors seem to be nervous because of concern over the state of the economy and how it is affecting corporate profits.
There is nothing wrong with the market and the economy that a good injection of liquidity, in the form of easier money and lower interest rates, could not help. The Fed is right in wanting to get rid of inflation. But trying to do it too quickly runs the risk of creating another recession. Because the Fed will have to pump up the money supply to get us out of such a slump, such a development would, ironically, push the day of stable prices even further into the future.
