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Pessimistic Economists at It Again

The Philly Fed's economic forecasters come up short once more.

Faster Pussycat


Bureau of Economic Analysis says

gross domestic product grew 5.6% during the fourth quarter.

A strong growth number surprised no one -- well, almost no one -- save the economists paid to predict it. Every three months the

Philadelphia Fed asks 30-odd economic forecasters what they think GDP will do next quarter. The latest eight Philly predictions, along with what GDP ended up doing, are presented in the table below.

Note the chronic underestimation. Note the mindlessness (every forecast in the table sits in a tight 2.1% to 2.7% range). Note the absence of a learning curve (the fourth-quarter forecast miss goes down as the biggest in years).

And most importantly, note that many of the same forecasters who have been screaming that the Internet and productivity will produce ever bigger growth rates are the very same ones who, even as late as early November, were predicting a fourth-quarter number as small as 1.5% -- and that they grudgingly marked it up only when the data made them.

Conviction ain't nothin' like still waters.


The table below shows GDP increases, alongside which sectors of the economy added to (a) or subtracted from (s) growth, for both the last two quarters and the last two years.

Consumption rose 4.4% during the fourth quarter, for example (this number is not shown in the table), and, because it accounts for roughly 68.29% of GDP, it contributed a full 3.03 of the 5.6 percentage points by which GDP grew. (To approximate this result, simply multiply 0.044 by 0.6829.) Also, recall the familiar equation that GDP = C + I + G + X and, looking at the fourth-quarter numbers, note that 5.6 (roughly) equals 3.03 plus 1.86 plus 0.72 less 0.03. Finally, note that Investment comes in four forms: business investment, residential building, commercial building, and inventory investment. Again looking at the fourth-quarter numbers, note that 1.86 equals 1.57 plus 0.44 plus 0.16 less 0.31.

Two additional notes.

The price index for gross domestic purchases, which measures everything Americans buy, including imports, put in a bottom a year ago, when it fell 0.2% during the first quarter. It then went on to rise 0.4% during the second quarter and another 0.7% during the third; today we learned it rose again, this time by 0.9%, during the fourth. Here the lazy analyst will point out that these are very modest accelerations, and that they come from a very low base -- and he's right as rain on both counts -- before going on to proclaim (again) that inflation is forever dead. But the diligent analyst will also recognize that the increase in the chain-type price index for personal consumption expenditures registered nil during the first quarter of 1998 before going on to rise 0.9% during the second, 1.0% during the third, and 1.2% during the fourth, and he will keep in mind that even a deceleration in growth does not preclude the price measures from continuing to drift higher. He will also wonder how deflationists will answer the troubling question that now plagues them. Given that we just emerged from three straight years of smartly stronger growth, why, if ever-stronger growth actually causes slower inflation, is any measure of prices rising at all?

What happens now? Did housing peak during the fourth quarter? No -- and ignore those who say it did. Is business investment finally about to crash, and will first-quarter growth come in as low as 1.0%, as the slowdown types insist? Perhaps and maybe; but keep in mind that these folks have been predicting the same things for quarters on end.

Why not pay more attention to the people who have proven that they actually


about these things? Bill Dudley at

Goldman Sachs

. Mike Englund at

MMS International

. Paul Kasriel at

Northern Trust

. The folks at

Salomon Smith Barney

. Together, this group reckons that the economy will turn in a first-quarter growth rate of about 2.6% (no small feat, that, given the huge fourth-quarter increase).

Is that forecast so infallible that you ought to run out and bet big on it now? Nope.

But at least the people who produced it are thinking.

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