Economists should be humbled by their misreading of economic prospects for this year. With few exceptions, they failed to assess the impact of the Keynesian stimulus to the economy from the huge tax cut and the resultant federal budget deficit. At the same time, they didn't foresee the flood of investments from abroad that tilted the dollar dramatically higher, resulting in boosted imports that helped to hold consumer prices down.
A consumer-spending binge led the economy out of the deep 1981-82 recession, coincident with a comforting rise in the stock market. All this has provided a convenient underpinning for President Reagan's reelection campaign. That Reagan had promised a business investment rather than a consumer boom has little relevance in the election campaign.
Now, there are multiple signs -- in sales, housing and financial markets -- that the recovery has peaked, and that activity is slowing down. Thus, the current game among the experts is to figure out whether that's good or bad. As former presidential adviser Alan Greenspan put it in an advisory letter to clients:
"Is the current slowdown a prelude to recession? Or is it just a temporary pause?"
Despite their poor record, no economist is at a loss for words -- and predictably there is very little agreement among them. David A. and S. Jay Levy, partners in a forecasting firm, go so far as to say that the recession has already arrived, the chief "villain" being the foreign-trade deficit that transfers profits abroad.
Greenspan cautiously notes that in most cases since the end of World War II, a slowdown after a sharp recovery turned out to be a temporary blip, folowed by a pickup in the economic-growth rate. Yet, he adds that "this is not to say" that things will not turn into a recession.
Martin Feldstein, who resigned as chairman of the Council of Economic Advisers in a dispute over the deficit issue, worries about the impact of a decline of 30 to 35 percent in the dollar -- which he says "must eventually" happen. A dollar collapse, he predicts, will lower the "supply of funds (available to U.S. capital markets), which could drive up interest rates and derail the recovery."
On the other hand, Jack Albertine, president of a business lobby, the American Business Conference, citing the drop in the September unemployment rate to 7.4 percent, from 7.5 percent in August, exulted: "The doom and gloom economists had better head back to their kettles and stir up some optimistic forecasts." (Albertine is reported to be in line for the CEA post in a second Reagan administration, but he denies the rumor.)
Roger E. Brinner of Data Resources, Inc., agrees that after sluggish consumer sales this past summer, "the next move is probably up," iting the settlement of disputes in the auto industry and evidence that the Federal Reserve is loosening monetary policy. But efforts to reduce the deficit, accompanied by a declining dollar, which will help boost import prices, will depress the economy in late 1985, Brinner thinks.
On the bullish side, economist Morris Cohen says that the preliminary gross national product forecast of 3.6 percent for the third quarter, down from 7.1 percent in the second quarter, puts at rest fears that the economy was moving ahead at an unsustainable speed and minimizes the possibility of a recession in 1985.
Cohen concedes that the slowdown reflects a dip in the consumer-spending binge -- only natural, he says, as the tax-cut stimulus fades away. But he predicts a rebound later on in consumer buying because of the outlook for sustained low inflation levels.
Allen Sinai of Shearson Lehman/Amer Express is less optimistic on consumer spending.He sees what amounts to a "growth recession" in 1985, with unemployment, after dipping to 6.5 percent at mid-year, turning up again.
But now, a new uncertainty -- and it's a big one -- has been added to the guessing game. Suppose Walter Mondale should win the election? All of the above scenarios were based on the conventional wisdom -- prevalent until the first debate seemed to brighten Mondale's chances -- that President Reagan was a shoo- in for reelection.
The first thing to bear in mind is that whatever happens to the huge American economy in 1985 is not likely to be much affected by a Mondale election: the course of events can't be changed overnight. Second, chances are -- despite the Reagan campaign rhetoric -- there would be a deficit-reduction package sought eventually by a reelected President Reagan as well as by Mondale.
The major unkown, in either case, is whether the Federal Reserve will respond to a tighter fiscal policy by further easing monetary policy. If it does, according to Chase Econometrics, interest rates would decline, and the interest-sensitive sectors of the economy would recover briskly as the deficit declines.
What's the bottom line? There are so many variables that what the economists are saying today is hardly more than a guess. About half of them will be dead wrong. The truth is that the real answer to Greenspan's question is: "Nobody knows for sure."