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Economic outlook survey: fourth quarter 1989.

Economic Outlook Survey

Fourth Quarter 1989

According to the December survey of 17 professional forecasters taken by the NBER and the American Statistical Association, real GNP grew 2.9 percent in 1989 and will grow 1.9 percent in 1990. Consumer price inflation will have averaged 4.8 percent in 1988-9 and will average 4.2 percent in 1989-90. Interest rates will decline moderately.

A Slowdown for 1989:4-1990:2

The median forecasts of annual growth in the economy's output for 1989:4, 1990:1, and 1990:2 are 1.0 percent, 1.8 percent, and 1.4 percent, respectively. Growth rates of 2.4 percent and 2.5 percent are expected for 1990:3 and 1990:4. Of the 80 quarterly predictions, seven (or 9 percent) are negative, including two declines of a single quarter each, one of two quarters, and one of three quarters. All of these declines are predicted through mid-1990. Only two respondents predict a full-scale recession with a duration of at least two quarters. The prevailing forecast is for a definite but short slowdown, followed by a restoration of moderate growth in the second half of the year. The gain in real GNP projected between 1989:4 and 1990:4 is 2.0 percent.

Since the last survey in September, participants have lowered their estimates of growth for 1989-90, but they still believe that a recession is unlikely. The following table shows the percentage distribution of forecasts of growth in real GNP. A comparison of percentage distributions of means calculated from the probabilistic forecasts reported by the survey participants show clearly that expectations have shifted to lower growth. The chances of a year-to-year recession, however, remain low.

Percentage Change
in Real GNP, September December
1989-90 1989 1989
4 percent or more 6 7
2-3.9 percent 45 33
0.1-1.9 percent 39 50
Negative 10 10

Moderate Increase in the Probabilities of a Short Recession

The estimated probabilities of a recession increased for 1989:4-1990:1 but decreased for 1990:2-1990:3 since the last survey. These distributions are skewed positively; the individual assessments are highly dispersed. Still, compared with past estimates, means of 25-30 percent are fairly high.

Mean Probability
of a Decline in September December
Real GNP, 1989-90 1989 1989
1989:4 17 25
1990:1 23 30
1990:2 29 26
1990:3 29 20
1990:4 n.a. 16

Unemployment Likely to Rise Slowly

The civilian unemployment rate is forecast to average 5.4 percent in 1989:4 and 5.6 percent in both 1990:4 and 1990 as a whole. (For 1989, the civilian unemployment rate was 5.3 percent.) The range for 1990:4 is 5.0-6.4 percent; the standard deviation is 0.3 percent. These forecasts are consistent with a rather short and mild setback to macroeconomic growth, not a long or severe recession.

Inflation Forecasts Vary, but Most Expect Some Improvement

The GNP implicit price deflator (IPD) is expected to increase 4.1 percent in 1988-9 and 3.9 percent in 1989-90. Although the survey medians show only a slight reduction in inflation, two-thirds of the sample expect inflation to fall between the two years.
Percentage Change September December
in IPD, 1989-90 1989 1989
8 percent or more 4 1
6-7.9 percent 13 6
4-5.9 percent 56 42
Less than 4 percent 27 50

The quarterly median forecasts of IPD inflation in 1989:4-1990:4 oscillate between annual rates of 3.7 percent and 4.4 percent. Few of the individual forecasts show any clear upward or downward drift.

The consumer price index (CPI) is predicted to rise on average 4.0-4.2 percent annual rate in each of the five quarters covered by the survey. The standard deviations vary between 0.5 percent and 0.7 percent. The range for 1990:4 is 2.9-5.2 percent; for 1990, the range is 3.5-5.0 percent.

Interest Rates Somewhat Lower in 1990 Than in 1989

The three-month Treasury bill rate is forecast to decrease from 7.6 percent in 1989:4 to 7.1 percent in 1990:2, then increase to 7.5 percent in 1990:4. The standard deviation for 1990:4 is 0.6 percent; the range is 6.5-8.2 percent. The annual medians are 8.1 percent and 7.4 percent for 1989 and 1990, with standard deviations of 0.1 percent and 0.4 percent, respectively.

The yield on new high-grade corporate bonds is expected to decline to 8.9 percent in 1989:4 and 8.7 percent in 1990:1, then to rise gradually to 8.9 percent in 1990:4. The median predictions for 1989 and 1990 are 9.3 percent and 8.9 percent; the standard deviations are 0.3 percent and 0.4 percent. All participants expect both the short and long-term interest rates to be lower on average in 1990 than in 1989.

Weaker Consumer Spending; Improved Housing Demand

Real personal consumption expenditures are predicted to have declined in 1989:4, according to the median forecast of the group. Their growth in 1988-9 is estimated at 2.7 percent; their growth in both 1989-90 and 1989:4-1990:4 is predicted to average 2.1 percent.

The forecasters expect a decline in housing starts of nearly 6 percent in 1988-9 and a rise of only 1.4 percent in 1989-90, but almost 8 percent between 1989:4 and 1990:4. The corresponding average forecasts for real residential investment are -2.1 percent for 1988-9 and 2.7 percent for both 1989-90 and 1989:4-1990:4.

Less Growth in Business Investment

Nonresidential investment in constant dollars has gained an estimated 3.9 percent in 1988-9; it is predicted to rise 2.7 percent in 1989-90 and 2.2 percent in 1989:4-1990:4. This would continue the shift from great strength (centered on producers' durable equipment) to growth rates not much higher than those of total output.

Business inventory investment still is expected to exceed $20 billion (1982 dollars) in both 1989 and 1990, not much less than in 1988, as the previous survey predicted. Thus, no major inventory cutbacks, characteristic of many past slumps, are anticipated by our respondents.

Small Gain in Industrial Production; No Further Reduction in Real Trade Deficits

Output of manufacturing, mining, and utilities, which rose strongly in 1988-9 (by about 3.4 percent) is expected to gain 0.8 percent in 1989-90 and 1.6 percent in 1989:4-1990:4. There are no significant revisions here from the previous quarter's forecast.

Net exports of goods and services were -$75 billion (1982 dollars) in 1988 and are now predicted to average about -$61 billion in both 1989 and 1990. This is a much more pessimistic forecast than that of the September survey (-$52 billion for 1989 and -$47 billion for 1990).

Some Optimism and Much Uncertainty about the Outlook for Profit

Survey correspondents estimate that corporate profits after taxes declined 4.7 percent in 1988-9 to a level of $161 billion. They are expected to show effectively no change on a year-to-year average basis in 1989-90. However, profits are predicted to gain 7.7 percent between 1989:4 and 1990:4. This median forecast would imply a partial recovery from the slide of 1988:4-1989:3, but the dispersion of the underlying individual predictions is very large (for example, for 1990:4 the interquartile range is $161-174 billion; the total range is $125-194 billion).

Cutbacks in Federal Purchases; State and Local Government Spending Steady

Federal government purchases of goods and services in constant dollars, after increasing 3 percent in 1988-9, are expected to decline 1.3 percent in 1989-90 and 1.6 percent in 1989:4-1990:4. The real purchases of state and local governments generally are seen as expanding smoothly at about 2.6 percent in 1989 and 1990.

Major Assumptions

Most forecasters foresee no significant changes in tax policy, but a few anticipate some tax increases. Most expect reductions in defense spending in the range of 1-6 percent. The reported assumptions about the growth rates in monetary aggregates M1 and M2 vary between 2 percent and 7 percent for the year ahead. Energy prices will be stable (according to seven forecasters) or rising (three of them responded). The quoted prices of oil/bbl. are $17-20. The views on the dollar remain divided. Four of the respondents assume that it will be flat or somewhat higher, while seven think it will be lower.
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Author:Zarnowitz, Victor
Publication:NBER Reporter
Date:Dec 22, 1989
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