# First quarter 1989.

First Quarter 1989

According to the March survey of 17 professional forecasters taken by the NBER and the American Statistical Association, there was strong growth in real GNP over the first quarter of 1989. This will be followed by moderation in the current quarter and the next, and by sluggishness late in 1989 and during 1990. Consumer price inflation should peak at around 5 percent (annual rate) in mid-1989 and average 4.6 percent next year, presumably as a result of tight money policy and the anticipated slowdown. Interest rates similarly are expected to increase in the near future and then return to the levels observed late in 1988. The predicted declines in real growth rates will come later but will be much more drastic for business investment than for consumption. However, the risk of a recession, as assessed by most of the respondents, is increasing but still not very high.

Growth Rates Declining in 1989, Low in 1990

The median forecasts of the annual growth rates in the economy's output were 4.4 percent for 1989:1, about 2 percent for 1989:2 and 1989:3, 1.1 percent for 1989:4, and 1.4 percent for 1990:1. Real GNP is expected to gain 2.7 percent in 1988-9, which is somewhat less than the forecast from the December 1988 survey, and 1.5 percent in 1989-90.

Thus 1989 is expected to make a strong entry but a weak exit. About one-third of the panel expect growth of less than 1 percent in 1989:4, including two respondents who predict that real GNP will decline. The situation is very similar for 1989:1. However, only one survey participant forecasts a recession severe enough to cause output to fall on an annual basis in 1989-90. Output is predicted to grow between 1.5 and 3.2 percent for 1989 and between-0.4 and 2.9 percent for 1990. (The standard deviations are 0.5 percent and 0.9 percent, respectively.)

Few See a High Likelihood of a Recession

The mean probability that real activity will fall, as estimated by the forecasters, increases from 14 percent in 1989:2 to 31 percent in 1990:1. These figures are somewhat higher than their counterparts in the previous survey. A few respondents see much higher chances of a recession, but most estimates fall below the means.

The rate of unemployment is expected to creep up to 5.6 percent in 1990:1 and 5.8 percent for 1990 as a whole, according to the group's median forecasts. The means are very close, the standard deviations are 0.3 percent in both cases, and the respective ranges are 5.0-6.2 percent and 5.2-6.5 percent.

Inflation May Level Off Soon

The GNP implicit price deflator (IPD) is predicted to rise 4.5 percent in 1988-9, 4.6 percent in 1989:1-1990:1, and 4.3 percent in 1989-90. The consumer price index (CPI), which rose 4.1 percent in 1987-8, may rise by 4.8 percent in 1988-9 and by 4.6 percent in 1989-90. These average forecasts reflect little movement and certainly no acceleration of inflation. Most individual forecasts fall into the 4-5 percent interval, but there are always outliers; for example, the range for the deflator in 1990:1 is 3.7-6.1 percent. (For 1990 as a whole, the range is 3.7-5.8 percent.)

There is a concentration of high inflation forecasts in 1989:2 (for CPI) and 1989:3 (for IPD). A majority of the forecasters specify that inflation will be higher in 1990:1 than in 1989:1, but most of the differentials are small.

Probabilistic Forecasts

To assess the uncertainty associated with the point predictions, we asked the forecasters about the probabilities they attach to possible percentage changes in real GNP and the IPD. The distributions of the resulting means are as follows:

The shift to lower real growth is very evident here. There is a rise in uncertainty about inflation but also a shift toward lower figures. This reverses the rise in inflation that was expected between 1988 and 1989 (as reported in last year's surveys).

Interest Rates Still Rising

but Lower Next Year

The three-month Treasury bill rate will increase to 8.8 percent in 1989:3 but then decline and average 7.8 percent in 1990, according to the group's median forecasts. (In December, a lower and earlier peak of 7.7 percent in 1989:1 was predicted.) The distributions are still skewed toward higher figures; for example, the range for 1990:1 is 7.0-11.5 percent, and for 1990 as a whole the range is 6.7-9.6 percent.

The yield on new high-grade corporate bonds is expected to rise, but slowly, to 10.3 percent in the second half of 1989. It will average slightly less than 10 percent in 1990, with almost all individual forecasts falling in the 9-11 percent interval.

Slowdown Moderate in Consumption,

Sharp in Nonresidential Investment

Real consumption expenditures are projected to grow 2.5 percent in 1988-9, 1.8 percent 1989:1-1990:1, and 1.6 percent in 1989-90. The forecasts imply less of a slowdown in consumption than in total output (or real income). This mainly reflects the expectation of a developing weakness in the business sector. The inflation-adjusted gains in nonresidential fixed investment are projected to decline from double digits last year to annual rates of 7.6 percent and 4.6 percent in the first two quarters of 1989, 5.4 percent and 0.5 percent in the last two quarters of 1989, and-3.7 percent in 1990:1. The annual averages are 4 percent for 1988-9 and only 0.2 percent for 1989-90.

Housing and Inventory Investment

Fairly Stable

New private housing starts are predicted to average 1.5 (annual rates in millions) in 1989:1, 1.4 in 1990:1, and slightly less than 1.5 in both years, 1989 and 1990. Real residential fixed investment is expected to gain 2.8 percent in 1988-9 and lose a little (-0.3 percent) in 1989-90.

The group forecasts a change in business inventories, in billions of 1982 dollars, of 30 for 1989 and 28 for 1990.

Small Gains in Industrial Production

and Corporate Profits

Output of manufacturing, mining, and utilities should rise by 3.5 percent in 1988-9 but by only 1.4 percent in both 1989:1-1990:1 and 1989-90.

Corporate profits after taxes in current dollars are predicted to increase 7.5 percent on average in 1988-9 (not bad, but much lower than the year before). They are expected to gain only 2.9 percent in 1989-90.

Import Surplus Reduced

Net exports of goods and services in billions of 1982 dollars averaged -99 in 1988 (-101 in 1988:4). The median forecasts are-89 for 1989, -78 for 1990:1, and -70 for 1990. These figures imply that the trade deficit will continue to decline in real terms. The reduction that the forecasters expect to be achieved next year is relatively large, probably reflecting in part the depressant effect on imports of the expected retardation of growth in demand and output and in part a persistent strength of exports.

Government Expenditures and

Policy Assumptions

Federal government purchases of goods and services in constant dollars are expected to grow weakly at 1.5 percent this year and to decline slightly next year. State and local purchases will rise more than federal purchases, and steadily: the median forecasts are 2.2 percent and 1.9 percent for 1988-9 and 1989-90, respectively.

Ten forecasters report that they have assumed no significant changes in tax policy; eight foresee increases in excise taxes and user fees. Five respondents see little or no change in defense outlays and ten expect decreases of 1-3 percent.

Estimates of monetary growth rates vary widely, from 1 percent to 6 percent for M1 and from 4 percent to 8 percent for M2 (using mid-points of the quoted ranges). Stable or strong oil prices are assumed by most respondents. The movements in the U.S. dollar are seen as either "moderate declines" or "stabilizing."

PHOTO : Projections of GNP and Other Economic Indicators, 1989-90

According to the March survey of 17 professional forecasters taken by the NBER and the American Statistical Association, there was strong growth in real GNP over the first quarter of 1989. This will be followed by moderation in the current quarter and the next, and by sluggishness late in 1989 and during 1990. Consumer price inflation should peak at around 5 percent (annual rate) in mid-1989 and average 4.6 percent next year, presumably as a result of tight money policy and the anticipated slowdown. Interest rates similarly are expected to increase in the near future and then return to the levels observed late in 1988. The predicted declines in real growth rates will come later but will be much more drastic for business investment than for consumption. However, the risk of a recession, as assessed by most of the respondents, is increasing but still not very high.

Growth Rates Declining in 1989, Low in 1990

The median forecasts of the annual growth rates in the economy's output were 4.4 percent for 1989:1, about 2 percent for 1989:2 and 1989:3, 1.1 percent for 1989:4, and 1.4 percent for 1990:1. Real GNP is expected to gain 2.7 percent in 1988-9, which is somewhat less than the forecast from the December 1988 survey, and 1.5 percent in 1989-90.

Thus 1989 is expected to make a strong entry but a weak exit. About one-third of the panel expect growth of less than 1 percent in 1989:4, including two respondents who predict that real GNP will decline. The situation is very similar for 1989:1. However, only one survey participant forecasts a recession severe enough to cause output to fall on an annual basis in 1989-90. Output is predicted to grow between 1.5 and 3.2 percent for 1989 and between-0.4 and 2.9 percent for 1990. (The standard deviations are 0.5 percent and 0.9 percent, respectively.)

Few See a High Likelihood of a Recession

The mean probability that real activity will fall, as estimated by the forecasters, increases from 14 percent in 1989:2 to 31 percent in 1990:1. These figures are somewhat higher than their counterparts in the previous survey. A few respondents see much higher chances of a recession, but most estimates fall below the means.

The rate of unemployment is expected to creep up to 5.6 percent in 1990:1 and 5.8 percent for 1990 as a whole, according to the group's median forecasts. The means are very close, the standard deviations are 0.3 percent in both cases, and the respective ranges are 5.0-6.2 percent and 5.2-6.5 percent.

Inflation May Level Off Soon

The GNP implicit price deflator (IPD) is predicted to rise 4.5 percent in 1988-9, 4.6 percent in 1989:1-1990:1, and 4.3 percent in 1989-90. The consumer price index (CPI), which rose 4.1 percent in 1987-8, may rise by 4.8 percent in 1988-9 and by 4.6 percent in 1989-90. These average forecasts reflect little movement and certainly no acceleration of inflation. Most individual forecasts fall into the 4-5 percent interval, but there are always outliers; for example, the range for the deflator in 1990:1 is 3.7-6.1 percent. (For 1990 as a whole, the range is 3.7-5.8 percent.)

There is a concentration of high inflation forecasts in 1989:2 (for CPI) and 1989:3 (for IPD). A majority of the forecasters specify that inflation will be higher in 1990:1 than in 1989:1, but most of the differentials are small.

Probabilistic Forecasts

To assess the uncertainty associated with the point predictions, we asked the forecasters about the probabilities they attach to possible percentage changes in real GNP and the IPD. The distributions of the resulting means are as follows:

Relative Change in Real GNP 1988-9 1989-90 4.0 percent or more 9 7 2.0-3.9 percent 59 41 0-1.9 percent 27 38 Negative 5 14 Relative Change in IPD 1988-9 1989-90 8 percent or more 2 3 6.0-7.9 percent 12 13 4.0-5.9 percent 62 54 Less than 4.0 percent 24 30

The shift to lower real growth is very evident here. There is a rise in uncertainty about inflation but also a shift toward lower figures. This reverses the rise in inflation that was expected between 1988 and 1989 (as reported in last year's surveys).

Interest Rates Still Rising

but Lower Next Year

The three-month Treasury bill rate will increase to 8.8 percent in 1989:3 but then decline and average 7.8 percent in 1990, according to the group's median forecasts. (In December, a lower and earlier peak of 7.7 percent in 1989:1 was predicted.) The distributions are still skewed toward higher figures; for example, the range for 1990:1 is 7.0-11.5 percent, and for 1990 as a whole the range is 6.7-9.6 percent.

The yield on new high-grade corporate bonds is expected to rise, but slowly, to 10.3 percent in the second half of 1989. It will average slightly less than 10 percent in 1990, with almost all individual forecasts falling in the 9-11 percent interval.

Slowdown Moderate in Consumption,

Sharp in Nonresidential Investment

Real consumption expenditures are projected to grow 2.5 percent in 1988-9, 1.8 percent 1989:1-1990:1, and 1.6 percent in 1989-90. The forecasts imply less of a slowdown in consumption than in total output (or real income). This mainly reflects the expectation of a developing weakness in the business sector. The inflation-adjusted gains in nonresidential fixed investment are projected to decline from double digits last year to annual rates of 7.6 percent and 4.6 percent in the first two quarters of 1989, 5.4 percent and 0.5 percent in the last two quarters of 1989, and-3.7 percent in 1990:1. The annual averages are 4 percent for 1988-9 and only 0.2 percent for 1989-90.

Housing and Inventory Investment

Fairly Stable

New private housing starts are predicted to average 1.5 (annual rates in millions) in 1989:1, 1.4 in 1990:1, and slightly less than 1.5 in both years, 1989 and 1990. Real residential fixed investment is expected to gain 2.8 percent in 1988-9 and lose a little (-0.3 percent) in 1989-90.

The group forecasts a change in business inventories, in billions of 1982 dollars, of 30 for 1989 and 28 for 1990.

Small Gains in Industrial Production

and Corporate Profits

Output of manufacturing, mining, and utilities should rise by 3.5 percent in 1988-9 but by only 1.4 percent in both 1989:1-1990:1 and 1989-90.

Corporate profits after taxes in current dollars are predicted to increase 7.5 percent on average in 1988-9 (not bad, but much lower than the year before). They are expected to gain only 2.9 percent in 1989-90.

Import Surplus Reduced

Net exports of goods and services in billions of 1982 dollars averaged -99 in 1988 (-101 in 1988:4). The median forecasts are-89 for 1989, -78 for 1990:1, and -70 for 1990. These figures imply that the trade deficit will continue to decline in real terms. The reduction that the forecasters expect to be achieved next year is relatively large, probably reflecting in part the depressant effect on imports of the expected retardation of growth in demand and output and in part a persistent strength of exports.

Government Expenditures and

Policy Assumptions

Federal government purchases of goods and services in constant dollars are expected to grow weakly at 1.5 percent this year and to decline slightly next year. State and local purchases will rise more than federal purchases, and steadily: the median forecasts are 2.2 percent and 1.9 percent for 1988-9 and 1989-90, respectively.

Ten forecasters report that they have assumed no significant changes in tax policy; eight foresee increases in excise taxes and user fees. Five respondents see little or no change in defense outlays and ten expect decreases of 1-3 percent.

Estimates of monetary growth rates vary widely, from 1 percent to 6 percent for M1 and from 4 percent to 8 percent for M2 (using mid-points of the quoted ranges). Stable or strong oil prices are assumed by most respondents. The movements in the U.S. dollar are seen as either "moderate declines" or "stabilizing."

PHOTO : Projections of GNP and Other Economic Indicators, 1989-90

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Title Annotation: | Economic Outlook Survey |
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Author: | Zarnowitz, Victor |

Publication: | NBER Reporter |

Date: | Mar 22, 1989 |

Words: | 1423 |

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