Economists Say to the Fed
"Mission Accomplished"

The elusive goal of an economic "soft landing" has probably been achieved. That's the opinion of the 34-member professional forecaster panel of the National Association for Business Economics. The latest government statistics support their conclusion. The U.S. Department of Commerce reported that Gross Domestic Product in the third quarter, 2000 grew at a 2.7% annual pace, about half the rate during the second quarter and slower than analysts expected. The slowdown was a welcomed and much anticipated response to the Federal Reserve Board's tightening of interest rates over the past 15 months. Indeed, the Fed chose to leave short-term interest rates unchanged at its mid-November meetings, putting to rest analyst worries that simmering inflation would nudge the Fed into another dose of rate hikes.

Even better news was that the third quarter numbers revealed continued underlying economic strength. Much of the decline in GDP stemmed from an unexpected and temporary 3.6% drop in government spending. Consumer spending actually accelerated to a 4.5% annual pace (up from 3.1% in the second quarter) and consumer confidence remained strong, prompting many forecasters to call for increasing strength in spending through the holiday shopping season. Provided that growth stays in the 3-4% range, the Fed is likely to maintain a passive role and the "soft-landing" back to a solid but non-inflationary growth trajectory will be a fait accompli.

In their November, 2000 survey, the NABE forecasting panel sees slowing job growth but unemployment remaining at 4.2 percent in 2001. The median expected growth rate next year is 3.4%, while the median inflation forecast is 2.6%. Short-term interest rates will likely move somewhat lower in 2001. The panel believes the Fed is now finished with its tightening cycle and will actually begin easing by the middle of next year.

Over the longer term, the panel believes we are at or near the peak of this business cycle. Although the Fed's attempt to slow the economy into a "soft-landing" trajectory carries the risk of crashing into recession, the panel puts the odds at only 20% for 2001 and 25% in each of the two following years. Even the most pessimistic of the panel members put the odds of recession during 2001 at only 40%. Over 70% of panelists thought that the projected 3.6% inflation rate for 2000 would constitute the peak for this expansion. The large majority of the panel viewed the troubling inflation numbers of the past few months as the result of temporary upward pressure caused by rising oil prices, an event not expected to recur in 2001.

Lastly, in light of the recent debate between the U.S. Presidential candidates regarding use of the projected federal budget surplus, panelists were asked to assess the likely impact on that surplus if the economy moved into recession during the next three years. About 26% of panelists thought that the annual surplus would remain about $100 billion, and another 26% thought that there would still be a surplus, although less than $100 billion. About 41% expected thought the recession scenario would bring back a deficit.