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Third quarter 1989.

Third Quarter 1989

Victor Zarnowitz

According to the September survey of 15 professional forecasters taken by the NBER and the American Statistical Association, real GNP is expected to grow by 2.7 percent this year and 1.7 percent in 1990. Inflation as measured by the consumer price index (CPI) is forecast to fall from 5.1 percent in 1988-9 to 4.7 percent in 1989-90. Short- and long-term interest rates also are predicted to be lower on average in 1990 than in 1989.

Views on Recession and Unemployment: Divided but Stable

There is little change from the previous survey in the estimated probabilities of a recession. The mean estimates of the probability that total output will decline are 12 percent, 17 percent, 23 percent, 29 percent, and 29 percent for the five successive quarters 1989:3-1990:3. They are skewed to the right: that is, the medians are smaller than the means. The interquartile ranges shift upward from 0-15 percent for 1989:3 to 10-38 percent for 1990:3. In sum, a few forecasters see the likelihood of a recession in the year ahead as rising to a relatively high level, but most do not.

Most forecasters see the unemployment rate as increasing slightly. The medians are 5.4 percent for both 1990:3 and 1990 as a whole; the means are slightly higher. The ranges are 5.0-6.2 percent for 1990:3 and 5.1-6.5 percent for 1990.

Somewhat Lower Inflation Expected Next Year

The median forecast of the GNP implicit price deflator (IPD) is 4.4 percent in 1988-9 and 4.3 percent in both 1989-90 and 1989:3-1990:3. In terms of the CPI, inflation rates are expected to average between 4.3 percent and 4.7 percent in 1989:3-1990:3. Most of the individual predictions fall between 4 percent and 5 percent, with the outliers near 3 percent and 6 percent.

The mean probability distributions of relative changes in IPD exhibit persistent and high uncertainty about inflation in 1990. However, the following table indicates a moderate decline in inflation forecasts since the June survey.

A Short-Lived Slowdown and Uncertain Improvement

The median forecasts of the annual growth rates in the economy's output are close to 1.6 percent for 1989:3, 1989:4, and 1990:2; 0.8 percent for 1990:1; and 3.2 percent for 1990:3. There are only three single-quarter declines among the individual predictions and no declines of longer duration. The record shows that expectations of sluggish growth (below 2 percent annual rate) prevail for the second half of 1989, but that gradually they give way to expectations of higher growth rates later in 1990. Between 1989:3 and 1990:3, real GNP is expected to gain 1.9 percent.

Although 1990 should be better than the second half of 1989, according to the forecasts it will have less real growth than 1989 overall. Percentage distributions of the means, calculated from the probabilistic forecasts of output reported by the survey participants, indicate an almost 50-50 division between optimists and pessimists. Still, this is somewhat better than the corresponding results in the June survey, when pessimists outnumbered optimists 60-40.

Lower Interest Rates, Too

The medians from the new NBER-ASA survey predict that the three-month Treasury bill rate will average 7.8 percent in 1989:3 (down from the actual 8.4 percent in 1989:2). Thereafter, the rate is forecast to decline by approximately 0.1 percent per quarter, to 7.4 percent in 1990:3. The median for 1990 is about the same; the range of forecasts is 6.5-8.9 percent. The corresponding mean is slightly higher (7.6 percent, with a standard deviation of 0.8 percent). As many as 80 percent of the forecasters expect the T-bill rate to be lower in 1990:3 than in 1989:2, and to be lower overall in 1990 than in 1989.

The yield on new high-grade corporate bonds also is predicted to decline from 9.7 percent in 1989:2 to 9.1 percent in 1989:3, then slightly to 9.0 percent in the first half of 1990. The forecasts for 1990:3 average 9.2 percent and range from 7.9-10.0 percent. Thus, most forecasters expect the long-term interest rates to be fairly stable in the year ahead but to stay considerably lower than they were in the first half of 1989.

Forecasts of both the bill rate and the bond yield declined since the previous survey.

Consumption Steady, Housing Weak but Improving

Real personal consumption expenditures are predicted to grow approximately in step with real GNP in 1989:3-1990:3 at 1.9 percent. Their gains in 1988-9 and 1989-90 should be 2.2 percent and 2.0 percent, respectively.

Housing starts are expected to decline by 4.6 percent in 1988-9 but to rise by 5.7 percent in 1989:3-1990:3 and 4.1 percent in 1989-90. For residential fixed investment in 1982 dollars, the corresponding median forecasts are -1.6 percent, 2.2 percent, and -0.2 percent.

Business Investment Relatively Strong

Nonresidential fixed investment in 1982 dollars is expected to increase by 3.5 percent in 1988-9, 2.3 percent in 1989:3-1990:3, and 2.9 percent in 1989-90, considerably above expected growth in real GNP.

Business inventory investment generally is expected to be positive. The inventory change is forecast to average a little above $20 billion of 1982 dollars in both 1989 and 1990, not much lower than in 1988. Although the individual forecasts vary a great deal for this volatile series, no absolute declines in inventories are anticipated.

Small Gains in Industrial Production, Corporate Profits, and Trade

Industrial production (output of manufacturing, mining, and utilities) is forecast to rise a strong 3.4 percent in 1988-9, but only 0.9 percent in 1989:3-1990:3, and 1.6 percent in 1989-90. For corporate profits after taxes in current dollars, the corresponding annual growth rates are 2.1 percent, 3.3 percent, and 2.1 percent.

Net exports of goods and services in millions of 1982 dollars are predicted to average -75 in 1988, -52 in 1989, and -47 in 1990. This implies a decrease in the real trade deficit reductions to be achieved. The forecasts reflect the recent revision of the underlying data.

Smaller Increases in Government Spending

Federal government purchases of goods and services in constant dollars are expected to rise 3.3 percent in 1988-9 and 0.3 percent in 1989-90. Defense outlays generally are expected to change very little or decline slightly in the year ahead.

Most forecasts imply moderate and steady real growth for state and local government purchases (2.5 percent in 1988-9, 2.6 percent in 1989:3-1990:3, and 2.3 percent in 1989-90).

Major Assumptions

Most forecasters assume "no significant changes" in tax policy. Some respondents consider the probability of small tax increases and a reduction in the capital gains tax in the year ahead. The few reported assumptions about monetary growth rates are concentrated between 2 percent and 6-7 percent for both 1989 and 1990 and for both M1 and M2. The views on energy demand and prices are fairly evenly divided between those who expect stability and those who specify increases. The quoted prices of oil vary in the range of $15-22 per barrel. The views on the dollar are divided similarly between rises and declines, but most of the expected changes are described as "slight" or "moderate."
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Title Annotation:economic outlook survey
Author:Zarnowitz, Victor
Publication:NBER Reporter
Date:Sep 22, 1989
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