To put it mildly, last year was a disaster for economists and others whose business it is to forecast the economy. "The year 1982," says Lawrence Chimerine of Chase Econometrics in a recent mea culpa, "will go down in history as probably the worst year in memory for economic forecasters."
I am certain to get mail from a handful of numbers-watchers who will be able to prove--to their satisfaction, at least--that they did better than the pack. To them, in advance, my congratulations!
But as Chimerine says, most economists--himself included--not only failed to see that 1982 would wind up in a recession, but that the economy would be hit harder than at any time in 40 years.
The more or less standard forecast for 1982 at this time last year was in tune with the optimistic view of the Murray Weidenbaum Council of Economic Advisers that the "recession is expected to end early in 1982, followed by a resumption of growth by midyear." Unemployment would peak by spring and dip to 8.4 percent at the end of the year.
What went wrong? The major forecasting error, Chimerine says, was the choice of the wrong underlying assumption: namely, that Congress would have better sense than to pass the entire Reagan tax cut package.
Instead, with the Democrats' help, even more features were added to the 1981 tax giveaway. And the Federal Reserve proceeded to over-do monetary stringency, creating "much higher interest rates (especially long-term rates), and for a much longer period, than we anticipated," according to Chimerine.
Even so, the forecasters undershot the full magnitude of the recession that was developing, and of the devastating impact that high interest rates were having not only on the business and housing sectors here, but also on the debt service costs of the Third World countries.
There were many shrewd analyses by followers of the oil market showing that the oil glut would continue through 1982, but the "establishment" economic forecasters tended to hoot these down. Thus, they missed the potential impacts of falling oil prices, among them the over-exposure of banks heavily committed in oil-producing areas here and in Mexico.
Moreover, there was little appreciation--except perhaps from Henry Kaufman and Albert Wojnilower (Messrs. "Doom" and "Gloom" of Wall Street)--of the growing weakness of U.S. business corporations, which led to a record number of bankruptcies.
Former West German central bank president Otmar Emminger observed in an interview last fall that when Third World countries proposed more borrowings, supposedly sophisticated international bankers continued to lend them money, anticipating that economic recovery would come along, just as it did after the first oil shock in 1973.
"They were counting on a continuance of inflation and on relatively low rates of interest," Emminger said. But that didn't prove out, either: For the third year in a row, the world economy did not recover and, instead, stagnated. Inflation fell, but real interest rates remained high. Commodity prices fell to a 30-year low, and it is commodities, rather than manufactured goods, that provide 60 percent of the income of the non-OPEC Third World countries.
In hard-pressed South America, 50 to 75 cents of every dollar earned had to be set aside just to pay interest on old debt.
With double-digit interest rates and plunging commodity prices, how could Third World countries pay off their debts and continue to import goods from the West? They couldn't--and in 1982, as a result, our exports fell sharply while imports remained high.
But find a forecaster who had a glimmer of this last year. Very few of them, although they pay lip service to interdependence of the world's economies, were able to visualize last year how the strains and stresses in the Third World would worsen the recession here.
What worries me is that the "pack" has pretty much the same economic scenario for 1983 as it did for l982: The recession will bottom out soon, and there will be a resumption of growth some time between the middle and end of the year. Advance word of the Martin Feldstein CEA report, due at the end of this month, indicates that it will project a bare 1.5 percent growth for the year, but a 3 percent gain, end-of-1983 over end-of-1982.
This would be a very fragile recovery indeed. But will there be a positive scenario of any kind?
Chimerine, though once bitten, says that the "underlying fundamentals are more favorable than in several years." But just as was true last year, he is making a key assumption: "The policy focus will be further shifted toward economic growth by pushing interest rates down in order to fuel an economic recovery." Clearly, such a policy turn--sharply away from the original concept of Reaganomics--is what's needed. But that's a high-risk basis for forecasting.
The Conference Board, a New York-based research organization, reporting that nine prominent economists anticipate only a modest recovery this year, makes a shrewd comment: "Their optimism about 1983 seems to be based more on hope than conviction." The harsh reality is that economic forecasters are still operating in the dark: 1983 could be the fourth year in a row of stagnation, instead of a year of token recovery.