Economic Forecasters Expect Moderate Recovery in 2002 --- Wesbury Led a Group Of Bears Who Called The Recession of 2001
By Jon E. Hilsenrath
Staff Reporter of The Wall Street Journal
4 January 2002
The Wall Street Journal
(Copyright (c) 2002, Dow Jones & Company, Inc.)
It was a rough year to be an economic forecaster. Few economists anticipated a full-fledged recession. Fewer still expected the aggressive response of the Federal Reserve that sent short-term interest rates to their lowest level in 40 years. Then the Sept. 11 terror attacks occurred, forcing everyone to revise their forecasts all over again.
But for a small group of bearish economists, everything seems to have gone as expected, leading them to the top spots in The Wall Street Journal's economic-forecasting survey for 2001.
Atop the pack
was Brian Wesbury, chief economist at
Mr. Wesbury was followed by several other bears, all of whom called for slow growth or a moderate contraction during the first nine months of the year. Among them, Tracy Herrick with Jefferies & Co., a Los Angeles-based institutional trading company, was especially sharp with his GDP forecasts. He predicted a contraction in third-quarter GDP back in December 2000.
economic bear finished on top. One perennial bear, A. Gary Shilling of Shilling
& Co. in
dead last this year was Gail Fosler, chief economist
at the Conference Board in
To pick this year's winner, The Wall Street Journal looked at average growth forecasts for the first nine months of the year, based on January and June surveys. Economists were also ranked based on their June predictions for interest rates and exchange rates through year's end, and inflation and unemployment rates through November. Economists also were asked another question back in June: Was the economy already in a recession? While the NBER had not yet declared a recession, two key economic indicators, payroll employment and industrial production, had started to fall, signaling that the sharp economic slowdown might actually be something worse. Yet only nine of 52 economists surveyed said that a recession had started. Nearly two in five said the chances of a recession were still less than 30%.
"The whole year has actually been a nightmare for economists," says James Bianco, founder of Bianco Research LLC, who did his own study of 19 years of Wall Street Journal economic surveys and found economists failed to predict the right direction of long-term interest rates 71% of the time. Even Mr. Wesbury was off on interest rates. Like many economists, Mr. Wesbury greatly underestimated the degree to which the Federal Reserve would ease short-term interest rates. Mr. Wesbury expected the bond-equivalent yield on three-month Treasury bills to end the year at 3.45%. Instead, yields on bills ended much lower, at 1.69%. He was a little low on his forecast for the 10-year Treasury note, calling for a 4.75% yield when it finished at 5.02%. But he was close to the mark by projecting a sharp weakening in the Japanese yen to 135 against the dollar; it finished at 132.
forecasting is like hitting in baseball. Just hitting some of the pitches is
good," says Mr. Wesbury, who has been taking
swings at the economy since he took an introductory economics class as an
undergraduate student at the
recently, he served a brief stint as the chief economist for the Joint Economic
Committee of Congress in 1995 and 1996, when the government ground to a halt
amid budget battles between Congress and the
Mr. Wesbury says his main clue for 2001 was the sharp upward movement in inflation-adjusted interest rates in mid-2000. When the federal-funds rate, controlled by the Federal Reserve Board, went near 4.5% after adjusting for inflation in 2000, he says he knew the economy was heading for trouble. The last time the inflation-adjusted federal funds rate was that high was just before the 1990 recession. Such a high rate implies that companies are having a harder time obtaining credit.
Today, the inflation-adjusted federal-funds rate is close to zero, thanks to 11 interest-rate cuts in 2001. Mr. Wesbury says that implies that a recovery is on the way. But he doesn't think it will be a strong one. Corporate profits have fallen so sharply and manufacturers have so much excess capacity, he believes that investment in both inventories and equipment will be slow to recover in 2002, holding back the rebound.
Longer term, though, he is among the biggest bulls in the survey. Mr. Wesbury was one of only five economists in the poll to say the nation's potential for long-term productivity growth is greater than 3%. Most see it between 1.5% and 3%. Alan Greenspan, chairman of the Federal Reserve Board, has said that robust productivity growth was one of the key underpinnings for the economic boom of the 1990s.
"We're going to come out of this relatively slowly, but the economy will build momentum behind it," says Mr. Wesbury. He sees the economy contracting in the first quarter, but reaching a 3.8% annualized growth rate in the fourth quarter, which is still below the late 1990s' rate.
1. Brian S. Wesbury
2. Kathleen Camilli Camilli Economics
3. Tracy Herrick Jefferies & Co.
4. R. Berner/D. Greenlaw Morgan Stanley
5. Lawrence Kudlow Kudlow & Co.
6. William T. Wilson Ernst & Young
(See related article: "Growth Is Seen Rising To 3.6% Later in Year, Subpar for Trough End" -- WSJ Jan. 4, 2002)