How the Top Forecaster Edged
Out His Rivals
By Patrick Barta
Staff Reporter of The Wall Street Journal
865 words
2 January 2001
The Wall Street Journal
A2
English
(Copyright (c) 2001, Dow Jones & Company, Inc.)
He didn't win
by much. Hot on Mr. Hyman's heels were Robert DiClemente
of Citigroup Inc.'s Salomon Smith Barney, Thomas W. Synnott of U.S. Trust Corp. a unit of Charles Schwab Corp.,
Kathleen Camilli of Tucker Anthony Inc. and
Allen Sinai of Decision Economics Inc., all of whom scored within two
percentage points of Mr. Hyman. Each could have won easily with only a minor
change in bond yields or currency exchanges.
Moreover, all
five had one thing in common: They thought the economy would grow at a
relatively fast pace during the first three quarters of the year, and they were
right. Although all of the more than 50 economists surveyed underestimated
growth in gross domestic product for the first three quarters -- it came in at
4.2% -- all of the top five thought GDP growth would
at least exceed 3.5%, putting them closer to the target than most. Many others,
by contrast, thought there would be a slowdown in early 2000, which caused them
to fall further off the mark.
But if there
was one area in which Mr. Hyman stood apart, it was his accuracy in predicting
interest rates. Unlike some of the other top economists, who thought growth
would remain relatively strong in the second half of the year (some even predicted
GDP growth would increase during the third quarter),
Mr. Hyman saw the seeds of a slowdown as early as midyear. As a result, he bet
correctly that the Federal Reserve would stop raising interest rates and
investors, convinced inflation was licked and hungry for safe investments in a
slowing economy, would drive bond yields down.
For example,
Mr. Hyman pegged the federal-funds rate (which governs overnight loans between
banks) at 6.5% -- a dead-on call. Similarly, he predicted yields for
three-month Treasury bills would fall to 5.8%, only slightly below their 5.9%
finish, and yields for 30-year Treasurys would drop
to 5.6%, just a tad above their current 5.5% level.
Indeed,
"by the second half of the year, there were forces starting to build that
we thought would slow the economy," says Nancy Lazar, a partner at ISI
Group (Mr. Hyman was unavailable for comment). In particular, she said, the
company was watching the latest round of central-bank tightenings
around the world, the surge in energy prices, and the
beginnings of a "pronounced slowdown" in capital spending at
technology companies, Ms. Lazar says.
In an age
when most economists rely on sophisticated computer models to make predictions
and produce slick number-filled spreadsheets for their clients, Mr. Hyman --
one of the most decorated economists on Wall Street -- is a big proponent of
using anecdotes and hunches to understand the economy. His forecasts are often
informed by what he picks up from newspaper clippings and polling data from
companies, and he has at times attributed some good calls to luck. He is also
known for the somewhat manic newsletters he sends to clients, which are often
covered in handwritten arrows, equations and comments. He studied at the
Looking
forward, there is great division among the top economists over where the
economy is headed next. Mr. Hyman, for example, is currently predicting
sluggish GDP growth during the first half of the year, and he puts the risk of
a recession at about 40%.
Ms. Camilli is even more negative, expecting GDP growth to slip
into negative territory for the first two quarters of 2001 before recovering in
the second half of the year. "In 250 years of history, the business cycle
has not been repealed," she says. And although she says she has been
surprised by the depth of the recent slowdown, she now believes fallout from
the humbled Nasdaq Stock Market and high energy
prices will significantly drag down growth in the coming months.
Mr. Synnott, on the other hand, foresees modest growth. And Mr.
DiClemente, even though he predicts a "bumpy
landing" in the first half, expects a relatively strong second half.
"We're all going into the new year with sad faces, thinking we don't know
how low low is," says Mr. DiClemente.
"But I still think there's a very good case for optimism that this will
prove a manageable slowdown, and a year from now we'll all be smiling going
forward," thanks to low inflation, lower interest rates, and continued
productivity gains.
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Star Forecasters
RANK/FORECASTER AFFILIATION
1. Ed Hyman ISI Group
2. Robert DiClemente Salomon /Citibank