Grossly Dismal Predictions: Pros Rethink Outlook After GDP Miss

Friday’s unexpectedly strong report on the health of the nation’s economy caught many Wall Street forecasters with their predictions down.

Only five of 49 economists polled by Bloomberg News predicted that Friday’s report on the U.S. gross domestic product would show the economy grew as fast as its actual 2% annual pace. Many of the biggest investment banks expected more striking proof that growth slowed from last year’s 5.6% pace.

Wall Street’s pessimism may have been worsened by its front- row seat watching the last year’s stock price declines. Goldman Sachs economist Edward McKelvey, for example, anticipated 0.8% growth, down from 1% in the fourth quarter.

Lehman Bros. economists Stephen Slifer and Joseph Abate correctly forecast the growth rate. But the only other two who expected 2% were Clement Gignac, chief economist at National Bank Financial in Montreal, and Suzanne Rizzo, chief economist at Maria Fiorini Ramirez Inc. in New York.

For most people, “this is very far from a recession,” Gignac said. “It’s a Wall Street recession and a Silicon Valley recession, not a Main Street recession.”

Those who thought the economy was slowing down said they had been counting on a bigger drop in business spending for things such as equipment and software, which declined 2.1%.

Others, such as Credit Suisse First Boston’s chief economist, Neal Soss, blamed the surprise on a temporary “pop in federal government spending.” Soss forecast 1.2% growth.

Brian Fabbri, chief economist at BNP Paribas, projected that the economy would shrink 0.2%. He was stumped partly by signals from Federal Reserve Chairman Alan Greenspan and the central bank’s unexpected decision to cut interest rates April 18. Listening to Greenspan, “you would think investments were going to crumble,” he said.

Investors were surprised, particularly in the bond market, which has been buoyed since mid-2000 by the perception that the economy is slipping into its first recession in a decade.

Bond investors “want validation that there’s going to be a recession, and they were shocked when they didn’t get it,” said Robert Smith, chief investment officer at Sage Advisory Services in Austin, Texas.

Investors may still get the evidence of recession they were looking for, economists say. Many Wall Street soothsayers are sticking by their forecasts for a slowdown later this year.

Definitions of recession vary. The common view puts it at two consecutive quarters of contraction in the economy.

No matter what forecasters say, after the GDP report, it’s harder to make the case the economy is collapsing.

“You can’t have a recession while GDP is rising!” wrote Kenneth Mayland, president of Clearview Economics in Pepper Pike, Ohio.

If Monday’s report on personal spending is any guide, more surprises are in store. The report showed spending by consumers increased 0.3% last month, more than the 0.2% gain forecast, on average, by economists in a Bloomberg News poll.