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The year in review: rating the consensus and bureau 1991 forecasts.

As part of its public service function, the Bureau of Business and Economic Research (BBER) at Memphis State University compiles, analyzes, and disseminates a wide variety of economic information at the national, state, and local levels. Normally, its basic task is to follow and report on economic trends in as timely a fashion as the current data allow. However, once a year the Bureau stops to reflect on those trends and provide a forecast of likely trends during the upcoming year.

The Memphis community has access to a large selection of macroeconomic forecasting services that generally require a subscription fee. Moreover, many other forecast of economic trends are readily available in newspapers, business magazines, and economic journals. The Bureau's main objective is to sort through these forecasts and determine a consensus forecast for the upcoming year. Then, as a counterpoint, the Bureau seeks to provide an alternative assessment or confirmation of the consensus forecast. In this way, the Bureau seeks to (1) provide the Memphis community with the latest information on likely economic trends over the next twelve months based on a consensus forecast and (2) provide an expanded analysis of the economic factors that are most likely to impact those trends in either a positive or negative way. The four economic variables that the Bureau forecasts are economic growth, interest rates, inflation, and unemployment.

The following synopsis of last year's forecast illustrates just how challenging (and humbling) gazing into that crystal ball can be. The dramatic and swift change in economic events during 1991 left many an intrepid forecaster dead in his tracks. Not to mention the general confusion associated with the Department of Commerce's switch to Gross Domestic Product (GDP) as the new measure of economic performance and the rebasing of most economic indicators to 1987 dollars. However, a brief look back at the Bureau's forecast for 1991 can provide a somewhat clearer picture of which economic trends most affected the economy's performance.

ECONOMIC GROWTH

The consensus forecast suggested a shallow recover beginning during the third quarter of 1991, with total growth for the year at a meager 0.1 percent. The consensus also pinpointed the start of the recession in October 1990, which was the beginning of the first of two quarters of negative economic growth. As a counterpoint, the Bureau forecast a much longer and weaker slowdown throughout most of 1991 with the recession beginning much earlier in July 1990.

ACTUAL: Economic growth stalled during the fourth quarter of 1991 registering an annual rate gain of only 0.3 percent. The first quarter of 1991 opened with a decline of 2.5 percent, followed by subpar positive growth rates in the second and third quarters of 1.4 and 1.8 percent, respectively. Faltering consumer confidence translated into reduced spending during the last quarter of 1991. Exports remain the only bright spot on the economic horizon.

The Bureau correctly foresaw an earlier start to the recession and much weaker growth during the second half of 1991 compared with the consensus forecast. The much-anticipated second and third quarter gains had many forecasters proclaiming the end of the recession. While the fourth quarter 1991 estimate is subject to two more revisions, the final verdict on when the recession ended will be open to debate, especially if there is a downward revision in the fourth quarter estimate.

INTEREST RATES

The consensus forecast of short-term rates ranged from 5.75 to 6.25 percent and 8.0 to 8.5 percent on long-term rates. The Bureau, in turn, had short-term rates at 6.26 percent and long-term rates in the range of 8.75 to 9.25 percent.

ACTUAL: Notwithstanding the Fed's dramatic one percentage point cut in it discount rate in mid-December, interest rates drifted incrementally lower for most of the year. Unforeseen in the interest rate forecast for 1991 were the lingering effects of a credit crunch precipitated by stricter bank lending practices and a much steeper than anticipated decline in the demand for credit from consumers and businesses. By year's end, short-term rates stood at 7.39 percent. However, based on a standard bank lending rate of prime plus two percent, the cost of borrowing money would more likely approximate 8.5 percent. With both the consensus and Bureau forecasts underestimating the rapid decline in short-term interest rates for 1991, the basic conjecture that long-term rates would remain high was generally confirmed as the spread between short and long rates widened during the year. To their credit, the consensus forecast correctly pinpointed the mortgage rate fall to 8.45 percent by year's end.

INFLATION

The consensus forecast estimated an inflation rate of 4.9 percent versus the Bureau's forecast of 6.5 percent.

ACTUAL: The Consumer Price Index (CPI) advanced 3.1 percent in 1991, the lowest rate in five years. The rapid adjustments of world oil markets after the swift ending to the Persian Gulf war took most economic forecasters by surprise. An average of acquisitions cost of $33 a barrel in October 1990 had evaporated to $18 a barrel by June 1991. Moreover, total energy costs were 8.2 percent below year-ago levels, and food prices advanced a moderate 1.7 percent. However, the so-called "core" inflation rate (less food and energy) rose 4.5 percent during 1991, more closely approximating the consensus forecast.

UNEMPLOYMENT

The consensus forecast pegged the national unemployment rate at 6.6 percent in 1991. The Bureau's outlook called for a slightly higher rate of between 7.0-7.5 percent.

ACTUAL: After entering the year with just under 7.0 percent unemployment, the rate drifted lower through the first nine months of 1991. However, renewed weakness in the economy saw the unemployment rate climb back up to 7.1 percent by year's end. While the Bureau's forecast of a more prolonged slowdown and a weaker recovery was, for the moment, generally confirmed by the rise in unemployment, the average annual rate for 1991 will more likely fall below the 7.0 range.

As this brief review illustrates, dramatic shifts in economic policy and swift reversals in economic trends can wreck havoc on any forecast. Perhaps, that is why it is imperative in the forecasting field that if one is to forecast, then one must forecast often. The Bureau's forecast for 1992, however, will have to wait twelve months for its next review with the full knowledge that, like 1991, 1992 will most likely face other unforeseen dramatic and swift changes in economic trends.
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Author:Gnuschke, John; Alvarado, Lew
Publication:Business Perspectives
Date:Dec 22, 1991
Words:1082
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