NEW YORK — Economists, practitioners of the so-called dismal science, are anything but gloomy on the prospects for the year-2000 economy. In fact, they are downright euphoric — and that in itself could be a caution sign.
Nearly all of the economists in The Wall Street Journal's semiannual economic-forecasting survey believe that strong consumer spending, rising business productivity and tame inflation will keep the U.S. economy humming through the year 2000 — shattering records for the longest economic expansion in U.S. history.
The consensus forecast for the 53 economists in the survey calls for annualized growth in inflation-adjusted gross domestic product of 2.6 percent in the first quarter and 3.1 percent in the second, third and fourth quarters. Although they expect growth to slow from last year's torrid pace, mainly because higher interest rates will damp spending on housing and other interest-rate-sensitive sectors, the projections for the year 2000 are nevertheless healthy. (The U.S. economy expanded at an average annual rate of 3.8 percent for the first three quarters of 1999. The government will release preliminary estimates of fourth-quarter 1999 growth later this month.)
If the economy continues to grow past this month — which most economists insist is all but certain — the U.S. will have surpassed the previous record for the longest expansion, which occurred during the 1960s, when the economy grew uninterrupted for 106 months.
The economy's longevity "is like a human living to be 100," says Nicholas Perna, of Perna Associates in Ridgefield, Conn. "What's spectacular about this economy is not only its length, but that it's widespread and broad based geographically and demographically."
There are, of course, hurdles in the way of an expansion record. One of those was the much-publicized year-2000 computer glitch. With the new year passing largely uneventfully, most economists dismiss its potential to inflict harm. But a small group of economists, led by Edward Yardeni at Deutsche Bank Securities Corp. in New York, believes the problems could disrupt global commerce and cause the economy to fall into recession. "The global supply chains are only as strong as their weakest link," he says. Only one other economist, longtime bear A. Gary Shilling of Shilling & Co. in Springfield, N.J., is forecasting a contraction for this year based on his expectation of a stock-market correction.
Those two bears are in a lonely league. Most of the other economists in the survey echoed the bullish sentiments of Allen Sinai, economist at Primark Corp., a financial-research and economic-research firm in Waltham, Mass.
"There is no end in sight to the expansion," said Mr. Sinai, who contends the U.S. economy is operating in a "new era" in which a number of structural changes have made it possible for the economy to grow nonstop without triggering inflation — the culprit that has often led to economic downturns in the past.
But few economists are worried about inflation. The consensus forecast is for the consumer price index, the nation's most widely watched measure of inflation, to advance at an annual rate of 2.5 percent during the first half of 2000 and 2.3 percent during the second half. That is about the same as during 1999. As of November, the CPI was running at an annual rate of 2.6 percent.
Short-term interest rates will rise, the survey respondents say, as the Federal Reserve continues to tighten monetary policy. But the rate boosts will merely slow economic growth and won't derail it. The consensus forecast is for yields on 30-year Treasury bonds to ease from current levels to about 6.39 percent by midyear and 6.27 percent by year end. The bond-equivalent yield on short-term three-month Treasury bills is expected to be 5.59 percent by June and 5.58 percent by the end of 2000, slightly higher than current levels.
"The Federal Reserve would have to clamp down on interest rates aggressively to stop this expansion, and that is very unlikely," says Maria Ramirez, president of MFR Inc., an economic-consulting and money-management firm in New York. Ms. Ramirez says the Fed can't justify sharply higher interest rates, because there are so few signs of inflationary pressures and because doing so could prompt another financial crisis in developing countries. "Those countries will be in trouble if the Fed is too aggressive," because many emerging countries carry dollar-denominated loans.
Economists as a group are rarely so optimistic about so many things. Forecasters traditionally have relied heavily on theories that explain the link between the efficient allocation of resources and growth. Because economists tend to follow the notion of diminishing marginal returns and are always looking for the limitations of growth, economics is often referred to as the dismal science.
But that pessimistic bias has served forecasters poorly in recent years and may explain why they have repeatedly underestimated the length and strength of the current economic expansion. Beginning with 1996, consensus forecasts at the start of each year have underestimated growth by about 1.50 percentage points annually — the biggest cumulative miss on record, according to economists at Morgan Stanley Dean Witter in New York.
A year ago, the consensus estimate in The Wall Street Journal's 1999 forecasting survey called for GDP to grow at an annual rate of between 1.8 percent and 2.4 percent in the four quarters. Instead, GDP advanced between 1.9 percent and 5.7 percent during the first three quarters of last year and averaged 3.8 percent.
Economists had expected GDP to slow in 1999 because they thought a crisis — inflation, international financial turmoil, stock-market correction and a growing trade deficit were most often cited — would cause companies and consumers to sharply reduce their spending.
After being wrong so many times, economists have thrown in the towel, rejected their "dismal" teachings and have turned overtly bullish. To some contrarians, that isn't a good sign.
"These are the best of economic times by any measure. The economy is growing rapidly, inflation is nonexistent, unemployment is the lowest it ever has been, and real median household income — probably the best measure of our standard of living — had never been higher," says Mark Zandi, chief economists at the Dismal Scientist, an economic-consulting firm in West Chester, Pa. "When euphoria is running very high is when we should be most concerned."
Mr. Zandi worries that Americans are taking on too much risk on the mistaken assumption that the economy can expand forever. Investors are borrowing to buy stocks in hopes that the market will never decline. Construction companies, he says, are taking on too much risk by building expensive new homes and office towers on speculation, believing that if they build it, the buyers will come. Businesses are investing heavily in new products without doing thorough due diligence. "Hubris is running pretty high. That's when mistakes happen," he says.
But while Mr. Zandi may be worried, he isn't a bear. His own forecast calls for GDP to grow at an annual rate of 2.6 percent in the first quarter, which puts him about in the middle between the bears and bulls.Survey Finds Two PessimistsThe real bears are Messrs. Shilling and Yardeni — the only two economists in the survey looking for a recession. Mr. Shilling bases his downbeat forecast on the stock market, which he says is overvalued. "Stocks are on very thin ice," he says. "We are going to see a major bear market in stocks that will start soon." Mr. Yardeni's concern about the year-2000 computer glitches and their ability to disrupt the global supply chain are well-known.
On other questions, the survey found:
Thirty-nine of the 56 economists expect Asia, not including Japan, to have the strongest economic growth of any region in the world. Forty-three economists said Japan will have the slowest growth.
As a group, the economists remain bullish on stocks. Thirty-one have more than 50 percent of their personal savings invested in stocks. Thirty-six said they raised their personal stock allocation during 1999; 11 decreased their allocation. Most of the others said their allocation was unchanged.
Twenty-four respondents placed the odds of a recession this year at less than 10 percent; 26 placed the odds at less than 30 percent. When asked what would cause the next recession, nearly half cited tight monetary policy.