The end is coming; mark your calendars

The next recession will begin May 16, 2002 at 9:15 a.m.

That, anyway, is what economist James Smith predicts.

Don't laugh.

Mr. Smith is serious, albeit a bit cute.

Moreover, The Wall Street Journal ranks Smith, chief economist for the National Association of Realtors in Washington, as the most accurate forecaster for the second time in three years.

Recession timing aside, Smith's prediction calls attention to a dramatic change in the thinking of many economists. They no longer link the unemployment rate so closely to the inflation rate.

This shift could be called the "death of NAIRU" - that is, the non-accelerating-inflation rate of unemployment.

Three years ago, NAIRU was widely reckoned as 6 percent. If unemployment fell below that rate, inflation would accelerate.

Workers would insist on higher wages, forcing businesses to raise prices.

But the jobless rate remains parked below 5 percent; inflation remains dormant; living standards are rising.

"NAIRU was a long-standing myth perpetrated by the right wing of the economics profession," says James Galbraith, a liberal economist at the University of Texas, Austin. "That's now been debunked by Alan Greenspan."

Some policymakers at the Federal Reserve were believers in NAIRU and some remain believers. But Fed Chairman Greenspan has prevailed, allowing the economy to move forward despite persistent unemployment rates near 4 percent.

Smith figures unemployment will drop as low as 3.8 percent in the next five months. That would be the first time the jobless rate has dropped below 4 percent since the 1961-69 economic expansion.

Inflation, Smith adds, will run about 1.8 percent this year and next. Then it will increase to 2.5 percent in 2001.

And that's when the Federal Reserve will put on the monetary brakes to prevent accelerating inflation, thereby causing a mild recession in 2002, Smith predicts.

Smith explains his precise recession date by noting that the Fed is scheduled to issue industrial production data for April 2002 on May 16 of that year at 9.15 a.m. Those data will show a slump in output.

Subsequently, he continues, the National Bureau of Economics, Cambridge, Mass., will date the expansion as ending May 15, the recession starting May 16.

Smith also notes that today's polls show George W. Bush winning the presidency in 2000, and that a recession has occurred in the first term of every Republican president.

Smith calls NAIRU "a bit silly." He sees inflation as the result of too much money being poured into the economy by the Fed. Right now, his favorite measure of money is growing at an 8 percent annual rate, when 5 percent is "the ideal number."

Since it takes time for rapid money growth to cause more inflation, Smith expects accelerating inflation only in 2001.

Mr. Galbraith, however, places less emphasis on money. He maintains unemployment could fall much lower without harm.

"There is no shortage of workers and there isn't going to be any shortage," he says. Businesses will train and upgrade their workers to fill jobs that are open.

Galbraith recalls a story of his economist father, famed John Kenneth Galbraith. Visiting industrialist Henry Kaiser at his booming shipyard at the start of World War II, Galbraith Sr. asked how he screened job applicants for welding, metal cutting, and other positions. Many men were away at war, and labor was short.

"We ask them to turn to one side," Mr. Kaiser replied. "We look in their ear. If we don't see daylight, we hire them."

In other words, managers will improve worker skills when they must. This boosts productivity.

That's part of the story today, economists say. Higher productivity enables employers to pay higher wages without costs rising so much they must boost prices.

Other factors restraining inflation include weak trade unions, low commodity prices, and competition on a global basis magnified by huge trade deficits.

"Manufacturers can't increase their prices," says Tom Schlesinger, executive director of Financial Markets Center, Philomont, Va. He figures that with NAIRU so weakened, Fed policymakers are "groping for new ways to look at the economy."

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