US economy undershot forecasts for '85

Anyone can try to predict the future. The challenge is being right. That is what the nation's economists rediscovered in 1985 as they tried, with mixed success, to foretell the economy's twists and turns.

And however humbling 1985 was for forecasters, 1986 promises to be worse.

Forecasting ``has always been a tough game,'' says David Wyss, senior vice-president of Data Resources Inc., the nation's largest forecasting firm. The art of predicting is getting tougher in large measure because of more frequent major shifts in government policies.

With key questions about federal budget and tax policy unresolved, ``1986 is one the most uncertain years to forecast that we have on record,'' says Robert J. Eggert, editor of Blue Chip Economic Indicators. The newsletter tracks predictions made by 50 major economists.

The accuracy of economic forecasts is more than an academic curiosity. To varying degrees, business executives base their expansion or modernization plans for the year on the economic outlook. And forecasts by government economists help determine the amount of budget cutting Congress attempts, because the budget deficit is linked to the economy's health.

The 50 forecasters surveyed last January by Blue Chip Economic Indicators expected inflation-adjusted economic growth in 1985 of 3.3 percent, slightly above the economy's long-term growth trend of 3 percent.

If current government estimates prove correct, the economy actually grew 2.4 percent in 1985. The 0.9 percentage-point miss by the consensus forecast is ``about the average error over a 10-year period,'' Mr. Eggert says.

The overall shape of the economy in 1985 was ``about what people expected,'' says DRI economist Wyss. Last January DRI predicted economic growth in 1985 would be 2.5 percent, vs. the current government estimate of 2.4 percent.

With economists now polishing their estimates for 1986, there are a host of questions for which information about previous economic cycles provides few answers, notes David Hale, chief economist at Kemper Financial Services in Chicago.

Mr. Hale says his most-pressing questions involve the effects of the recently passed Gramm-Rudman-Hollings deficit-reduction bill, as well as the effect of any tax-reform bill Congress might pass.

Given these unknowns, it is not surprising they come to widely different conclusions about the economy's prospects in 1986. The 10 most-optimistic forecasters Mr. Eggert surveys expect inflation-adjusted growth in 1986 of 4.3 percent. The most pessimistic expect an advance of 1.7 percent.

The Reagan administration is still working on its revised forecast for the coming year. But Commerce Secretary Malcolm Baldrige said on a recent broadcast interview that ``we're going to see growth somewhere between 3 and 4 percent'' in the coming year.

Economists' best performance came predicting the jobless rate. Forecasters surveyed by Blue Chip predicted an average civilian unemployment rate of 7.2 percent, vs. an average rate of 7.22 percent for the first 11 months of the year.

The same group expected consumer prices to rise 4.2 percent in 1985, vs. an actual increase over the past 11 months of 3.6 percent. The economists saw another inflation measure, the GNP implicit price deflator, rising 4.1 percent in 1985. Final figures for the year, which are subject to change, indicate the deflator rose 3.3 percent.

of 5 stories this month > Get unlimited stories
You've read 5 of 5 free stories

Only $1 for your first month.

Get unlimited Monitor journalism.