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Unique 'T-bill index' predicts drop in output for '82

By Thomas WattersonBusiness and financial writer of The Christian Science Monitor / August 31, 1981



Boston

Question: Who are the best economic forecasters? Answer: A. Economists who work for presidents. B. Business leaders.

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C. Econometricians with their complex models.

D. None of the above.

The answer, Charles E. Babin believes, is "D." The correct answer, he says, is: People who forecast the economy with their checkbooks.

Among these people are investors in the US Treasury bill futures market at the Chicago Mercantile Exchange. By tracking how much the bid for the future price of T-bills, Mr. Babin and the computers at H. C. Wainwright & Co., Economics, A Boston economic consulting firm in which he is a partner, have been projecting the US gross national product -- the nation's total output of goods and services -- one year in advance.

On average, the futures market has forecast within about two-thirds of a point the actual T-bill rate since trading began in 1976, Babin notes. And since that year, he says, the Wainwright forecast of the coming year's GNP, based on this trading and other indicators, has not been off by more than one percentage point.

Last year, for instance, the projection was for a 1 percent drop in the nation's GNP; the actual growth was zero. The year before, both the projection and reality came in at plus 3 percent. The forecast for this year is for 2.9 percent growth.

But for 1982, while Reagan administration officials are talking about a 3.4 percent growth in GNP, the Wainwright computers see a drop of about 2 percent. Even allowing for a 1 percent margin of error, Babin says, that still means a GNP growth of minus 1 to 3 percent.

"The markets," he states, "are saying that the economy next year is going to have a minus sign on it."

In addition, he notes, while administration officials, including Treasury Secretary Donald Regan, are forecasting Treasury bill rates falling to around 9 percent next year, futures market quotations indicate 1982's three-month rate will average a bit over 12 percent, suggesting a much smaller overall drop in interest rates.

"We [at Wainwright] don't believe that as a firm we can forecast anything," Babin says. "Not the weather, not interest rates." The forecasting is being done, he asserts, by the marketplace.

"The market will discount, through prices, all pertinent information." This means, he explained, that people who are putting down their own money on things like interest rates are going to study every piece of information they can get their hands on and weigh it without regard to politics.Their only constituency is themselves, he indicated.

The T-bill futures market is apparently not the only place where skepticism about Reaganomics abounds. Since the middle of June, for instance, the Dow Jones industrial average has dropped some 120 points, and bond prices have also fallen sharply. And last week the Dow's descent continued, as the average plunged 28.35 points, closing at 892.22. On Thursday the Dow closed even lower, at 885.92, hitting its lowest level in more than 13 months.

Some analysts did see the possibility of a rally this week, however, because the Federal Reserve Board reported a $3.7 billion drop in the nation's money supply, a much larger decline than had been expected, and one that could lead to some easing of credit restrictions.

Still, investors' concerns about high interest rates and a continuing sluggish economy apparently haven't abated.

Even the Reagan administration was moved to take notice of the skepticism in the financial markets. While Reagan spokesman Larry Speakes said White House officials will continue to meet with financial community leaders, he added that there were no plans "for many full-scale blitz to bring Wall Street around."

If other analysts see the same problems Wainwright's Mr. Babin sees with the President's tax and spending cut package -- and reports indicate they do -- such a blitz probably won't do much good.

Instead of sticking with the "supply side" economics he touted in his campaign for the White House, Babin charges, the President signed a program that gives the median tax-payer a net effective tax cut only 7 1/2 percent for the entire three-year period.

Also, he notes, Mr. Reagan had proposed an immediate indexing of taxes to prevent the "bracket creep" phenomenon which pushes people into higher tax brackets as they receive cost-of-living pay raises. Later, he ditched this proposal as a compromise to help get his package through Congress, only to see Democrats restore it. The problem now is that it doesn't take effect until 1985 -- giving Reagan's first term none of the benefit of what Babin feels is this important tax break.

"Until 1985," he asserts, "the present tax cuts are not enough to keep the economy from falling asleep."

What's laft, Babin says, is not supply-side economics -- nor even the "incentivist" economics his firm believes was the essence of the original Kemp-Roth proposal, with its immediate, across-the-board 30 percent tax cut -- but a compromised package leading to bigger federal deficits and heavier government borrowing, which will help keep interest rates high and the economy slow.

And even if Secretary Reagan's forecast of a 3.4 percent growth in the GNP were to prove correct, Babin says, it would mean a 15 to 16 percent T-bill rate next year, indicating even higher overall interest rates.