Economic Forecasters See Modest,
Steady Recovery

There is good news in the consensus of macroeconomic forecasts made by a panel of 32 professional forecasters from the membership of the National Association for Business Economics (NABE). Based on responses from a survey conducted in mid-September, 2002, NABE panelists expect economic growth to pick up to around 3 percent in the second half of 2002 and accelerate further to between 3.3 and 3.8 percent for each quarter of 2003. Tim O'Neill, NABE president-elect and chief economist at the Bank of Montreal said "Policymakers don't need to rush to the aid of the economy. Economic growth may not be supercharged, but it is solidly positive."

Highlights follow.

• The expected pick-up in 2003 is thanks to an end to declines in business investment. To be sure, capital spending is still in the doldrums, and will record a decline of more than 5% in 2002, for the second year in a row. But growth will resume in 2003, even if anemic. Poor profits and excess capacity are the reasons cited by the forecasters for the continued slump in business investment, not corporate scandals or a credit crunch.

• Analysts expect consumers to continue propelling the economy, with real spending gains of about 3 percent. Incomes will continue to rise, as will employment. Inflation is expected to remain subdued. Indeed, the latest available data from the U.S. Department of Commerce show that personal income grew 0.4% in August and real disposable income (i.e., after-taxes and correcting for inflation) was up 2.3% from one year earlier. Consequently, consumer purchasing power is rising. Consumers seem to recognize this as real consumer spending was up in August by 0.3%, and was 3.6% higher than one year earlier. The Wall Street Journal noted that income growth is one of the economy's bright spots. The retail outlook for the upcoming holiday shopping season may not be as bleak as it appeared just a couple of months ago.

• Low interest rates (and Fed monetary policy) get the credit for offsetting much (not all) of the damage caused by equity market declines and higher oil prices. Panelists expect interest rates to stay low for awhile, but few expect the Fed to lower them further. Panelists were nearly unanimous in concluding that policymakers can hold off any further stimulus. The economy can recover on its own.

• The business press has been frequently citing three headline-grabbing economic hazards, 1) deflation, 2) double-dip recession and 3) a housing market "bubble." NABE panelists didn't assign a high probability to any of them. Panelists gave only a 20% chance to even one negative quarter of growth over the next 12 months (a double-dip recession needs two or more), a 10% probability to falling prices, and a 22% chance that housing prices have formed a "bubble" at risk of deflating.

• The biggest risk to the forecast is political risk, specifically, turmoil in the Middle East.

Perhaps the most interesting aspect of the survey, exactly one year after the terrorist attacks of September 11, 2001, is the change in opinions about the impact of those attacks on the U.S. economy. The first NABE survey after the attacks was conducted in November 2001. Panelists had concluded that the attacks had pushed the economy into a mild recession. A year after the attacks, only 12% of panelists believe that the terrorist attacks were the triggering event. About a third of the panelists believe that the recession was already underway, and that the attacks broadened and deepened the downturn. But more than half don't credit the attacks with causing or worsening the recession. About one quarter of panelists believe that, aside from the travel industry, the economic impact of the attacks was relatively small. Even more interesting, 28% of respondents think that the aftermath of the attacks actually shortened the down phase of this economic cycle by pushing policymakers to adopt rapid and substantial stimulus packages.