Winner of economic forecasting award sees two keys to growth
Boston — * There may well be no recession in the next Reagan administration. * The United States economy could grow at a healthy 4 percent annual rate during those years.
* Living standards should rise.
* Unemployment could continue to fall.
* Nor should there be a renewed inflationary spiral, although inflation may climb to a 5.5 to 6 percent annual rate by the end of 1986.
That's the cheerful view of Saul H. Hymans, winner of the latest top award for economic forecasting.
The predictions of the director of the University of Michigan's Research Seminar for Quantitative Economics hang on two key assumptions:
1. The Federal Reserve System will supply enough money to the economy to keep interest rates moving down until about mid-1985.
''What the Fed does is very important,'' Mr. Hymans said in a telephone interview.
2. Congress passes legislation this year that will start reducing the federal budget deficit.
Measures to cut spending and raise taxes need not knock the deficit from $200 billion down to $100 billion in one year, Hymans says. But they must make sufficient progress to prevent participants in the money markets from becoming alarmed and insisting on higher interest rates.
If these two assumptions come to pass, then substantial economic growth without much more inflation ''certainly seems feasible and something we can enjoy,'' Hymans says. The award he has just won is the fourth annual Silbert Economic Forecasting Award for accuracy, timeliness, and professionalism in economic predictions. Sponsored by Sterling National Bank & Trust Company in New York, it goes to the economist with the best forecasting record for the three previous years. (The three-year time span helps to avoid giving recognition to a flash-in-the-pan, one-time accurate forecast.)
Hymans is the first academic to win the award. He is also the first winner to have based his forecasts largely on the output of a major econometric model of the United States, that is, a computer-based tool that uses mathematics and economics to simulate the workings of the economy.
The Michigan Model of the US Economy is the oldest econometric model in the United States, started more than 30 years ago by Nobel Prize-winning economist Lawrence Klein, who later established the Wharton Econometric Forecasting Program at the University of Pennsylvania.
By comparison with models operated by Wharton, Data Resources Inc., or Chase Econometrics, the Michigan Model is rather small. It has some 200 equations, compared to 800 to 1,000 or so equations for the others. ''My view is that we are smaller and better,'' Hymans comments.
At the moment, the economy is in a slowdown. Hymans, however, expects it to pick up speed again in the first quarter of 1985. He predicts real gross national product, or GNP (the total national output of goods and services after allowing for inflation), will grow 3.8 percent in 1985 and 4.8 percent in 1986.
Further, he forecasts a small reduction in unemployment to an average level of 7.2 percent in 1985, followed by a somewhat larger decline to a 6.6 percent average for 1986.
As for inflation, he sees consumer prices going up 4.4 percent in 1985 and 5. 3 percent in 1986. (That change is measured by the personal consumption deflator , part of the GNP measuring system.)
Hymans does not expect a substantial renewal in industrial inflationary pressures - sometimes called ''core inflation.'' But he does figure on the US dollar dropping 4 or 5 percent a year in value on the foreign exchange markets for a couple of years. That would add around 1 percent to the inflation rate here as the price of imports rise.
Looking at interest rates, Hymans forecasts a drop of about 100 basis points (1 percent) next year from this year in short-term rates. Then, he says, interest rates will move up slightly in 1986.
Consumer purchasing power - real, after-taxes disposable income - should increase almost 3.5 percent in 1985 and about 3.75 percent in 1986, he forecasts.
Corporations should also prosper. He expects their profits to remain at about 7.75 percent of GNP. This is well above the postwar low of 5.2 percent reached in 1982.
Of course, there are other economists with gloomier viewpoints.
For example, A. Gary Shilling, a consulting economist, talks about a mild recession next year, if it hasn't already started. ''There is half a chance in 10 of going beyond 1985 without a recession starting,'' says Leonard Lempert, director of Statistical Indicator Associates, North Egremont, Mass.
John M. Godfrey, chief economist at the Barnett Bank in Florida, notes that since 1948, economic activity has peaked and a recession begun within one year of the time every Republican president has been sworn into office. The average time for the slump has been eight months. He's not sure history will repeat itself. But if it does, he says, it will be because of unwanted restrictive monetary policy, not as a result of action by the executive branch.
However, Hymans is the one who has just won the forecasting prize, and if his assumptions for Fed and congressional action prove correct, he sees a green light ahead for the economy.