Dow, Investors Look Down on Economists From a Lofty Perch


It has become fashionable among some commentators to poor-mouth the stock market: to warn that its shares are overpriced and its investors prone to lemming-like enthusiasms. The howl will almost surely grow still louder now that the Dow Jones industrial average has broken the 10,000 barrier.

But in at least one respect, the Dow’s performance--and, by extension, that of the nation’s investors--has been way ahead of the experts.

“The stock market has done a much better job at reflecting the strength and longevity of this expansion than economists have,” said Mark M. Zandi, chief economist with Regional Financial Associates, a Philadelphia-area forecasting firm. “We’re having to play catch-up.”


With the market closing at 10,006.78 on Monday before giving back about 93 points Tuesday, economists are jacking up their growth forecasts at a more feverish pace than at any time in recent years, according to the Blue Chip Economic Indicator, an Arizona-based newsletter that keeps tabs on economists’ predictions.

So in effect, are American consumers and many of the companies that serve them. Consumer confidence rose for a fifth straight month in March to its highest level since last July, the Conference Board, a New York business research group, reported Tuesday. Retail executives said in interviews that they are raising sales targets to keep up with continued strong consumer demand.

“We started in January planning for flat sales, but wound up having much stronger growth than we expected,” said Joseph E. Ettore, chief executive of the Connecticut-based, $4-billion-a-year Ames Department Stores Inc.

As an economic barometer, the market doesn’t always get it right. In 1987, for example, most people thought the stock crash of that year signaled the start of recession. Instead, the economy kept right on growing, almost through the end of the decade.

But consider the record of the most recent three years. As 1996 began, the consensus prediction of mainstream economists was that the economy would grow 2.2% more than inflation that year. The comparable consensus for both 1997 and 1998 was 2%.

As it turned out, economic growth was about double the consensus projection in all three years.

Contrast that with the Dow, which presaged the spectacular economic growth of the last three years by turning in spectacular performances of its own in each of the preceding years: 37% growth in 1995, 29% in 1996 and 25% in 1997.

“The people who participate in the market have shown a great deal more wisdom than the people who comment on it,” said Lawrence Kudlow, a Reagan-era conservative and chief economist with American Skandia Life Assurance Co. in Shelton, Conn. “Who are you going to believe?”

Economists’ explanations for why they have been so wide of the mark in the 1990s could unnerve anyone who depends on their forecasts in making decisions. Basically, these forecasters throw up their hands and ask, “Who could have predicted this kind of growth?”

“Economists are slaves to history, so when there are big departures from history, the forecasts are almost bound to miss them,” said Allen L. Sinai, chief executive of Primark Decision Economics Inc. in Boston. And the 1990s, he said, have been a gargantuan departure from history.

“Nothing remotely like the economy’s current performance has ever happened before,” added Bruce Steinberg, chief economist of brokerage giant Merrill Lynch & Co in New York. “So we’re off the road map.”

That performance seems likely to continue for some time, in large measure because consumers have signaled they intend to keep right on buying. The Conference Board’s index of consumer confidence climbed to 133.9 this month from a revised 133.1 in February, a sign that average Americans feel safe enough in their jobs to spend money.

Meanwhile, Federal Reserve policymakers have apparently decided not to rain on the economic parade for now. The Fed’s Open Market Committee, evidently convinced that inflation poses no danger, agreed Tuesday to leave short-term interest rates unchanged.

The consensus forecast for U.S. economic growth in 1999 among 50 economists tracked by Blue Chip Economic Indicator, meantime, climbed almost a full percentage point between January and February, from 2.4% to 3.3%. And it is likely to climb still further, according to the newsletter’s editor, Randell E. Moore. That means these analysts think the nation is going to produce about $75 billion more in goods and services than they began the year thinking it would.

What did these forecasters miss that the market saw?

Productivity growth, for one thing. The government says the average worker’s output shot up at an annual rate of 4.6% in the final three months of last year, an increase that most analysts thought was no longer possible.

The economy’s ability to weather global upheaval, for another. Economists have consistently seen a greater threat to the country in the Asian financial crisis, the Russian debt default and the Brazilian currency turmoil than American investors have. And it is the investors who have been right more often than not--so far.

“There’s a classic chicken-and-egg problem here,” said Robert A. Brusca, chief economist with Nikko Securities Co. International in New York. “The economy has gone up, but part of the reason is that the market has gone up.

“At some point,” Brusca said, “you’ve got to reconcile stock prices with some notion of value.” And when that happens, he warned, both the market and the economy could be in for a terrible fall.

* DOW DROPS A DIGIT: Stocks pulled back from the historic 10,000 level, while the Fed left interest rates unchanged. C4