Whose Economic Forecasts Can We Trust?
The head of one of America’s largest companies was very gloomy in a private luncheon conversation recently--but only about 1990 prospects for other companies, not his own, which he said was doing quite well, especially in foreign markets.
Similarly, a survey of 50 leading economists by Business Week magazine found that almost all of them worried about a recession--but few predicted one.
On the other hand, Financial World magazine published a survey of predictions by 2,000 security analysts about corporate profits in which the consensus forecast was for an extraordinary 12.9% average growth. That spells one of the best years in a long time--if the forecasts hold up.
But then again, which forecasts? There is a spread of 8 percentage points in U.S. economic growth between the most optimistic--David Levine of Sanford C. Bernstein research firm, who sees the U.S. economy growing 5.1%--and the gloomiest--A. Gary Shilling, head of his own consulting firm, who forecasts a recession with the economy declining 3.2%.
That’s roughly the distance between joy and despair, because 8% of the U.S. economy represents $434 billion in economic activity, or money enough to employ--or lay off--14.5 million people at the average U.S. household income.
Has there ever been such a mixture of gloom and optimism? “Sure, every year the forecasts are mixed,” says Adrian Dillon, chief economist of Eaton Corp., the Cleveland-based maker of car and truck components and electrical equipment. “Economists have been anticipating a recession for three or four years now, and it hasn’t come yet.”
Dillon himself foresees a reasonably strong 1990, with capital investment by business rising 6% and export markets for U.S. goods continuing to grow.
So what should you think of the year that starts at midnight? Think positive. But don’t pay too much attention to statistics. Truth is, many economic numbers that cheer or frighten people are not precise measurements but debatable estimates. That’s why there is such a variance in forecasts, and why even the smartest people can be wrong about the economy.
Right now, for example, economists are divided as to whether U.S. companies are investing enough to improve efficiency and productivity, with one group calling the 1980s the worst investment decade in 40 years, and another group calling it the best in history. The fight is over how to account for the computerized machinery that is replacing older equipment in practically every industry. Computers account for 45 cents of every investment dollar compared to 20 cents in 1979--and doubtless they’re bringing efficiencies, even if economists can’t agree on defining them.
How is the economy really doing? Look around you. Yes, there are some signs of slowdown--layoffs in the defense and auto industries. But unemployment is relatively stable, and surveys of employers don’t point to it rising in the first quarter of 1990. Last month, more than 200,000 new jobs were created--a very healthy figure. And, count on it, if Americans are employed, it won’t be a bad year.
There also are daily worries about the Federal Reserve and interest rates. And there’s no doubt that interest rates and tight money will affect real estate in 1990. But most U.S. companies finance their operations from internal cash flow, not borrowing--and much of major industry is expressing confidence that it can handle whatever turn the economy takes.
What may be happening is that U.S. industry is serving a world economy, not merely a national one. For certain, U.S. manufacturing companies are winning export markets and holding their own at home. U.S. exports rose an estimated 12% in 1989 and will be up a lot more in 1990, says economist Walter Joelson of General Electric.
Imports are rising, too, partly because foreign manufacturers setting up shop are bringing in parts and equipment. With labor costs now 30% below those of West Germany and 20% below Japanese labor costs, the United States is becoming the competitive crossroads of the global economy, says Dillon of Eaton.
“We’re exporting differentials to Volvo, the first time that has happened,” he says, “and in this country we supply 100% of the engine valves to Honda.”
How to think about the economy in 1990? Think skeptically of forecasts. Remember that a year ago nobody predicted 1989’s tremendous changes in Eastern Europe. The American people still don’t know what those changes mean, but they sure mean something--and it’s not bad.
Think as does Leslie McCraw, the president of Fluor Corp., the engineering company. McCraw said last fall, as he watched Fluor’s factory construction business growing 30% in the fiscal year ended Oct. 31, “The people we’re working for are such a cross section that if they’re doing so much work, something must be happening out there that people talking about recessions and soft landings don’t know about.” At the end of calendar 1989, Fluor’s business was perking along as strong as ever.
So, a thought for the New Year: Something is happening out there--and it’s really not bad.