First quarter 1989.

• Author: Zarnowitz, Victor
• Position: Economic Outlook Survey

First Quarter 1989

According to the March survey of 17 professional forecasters taken by the NBER and the American Statistical Association, there was strong growth in real GNP over the first quarter of 1989. This will be followed by moderation in the current quarter and the next, and by sluggishness late in 1989 and during 1990. Consumer price inflation should peak at around 5 percent (annual rate) in mid-1989 and average 4.6 percent next year, presumably as a result of tight money policy and the anticipated slowdown. Interest rates similarly are expected to increase in the near future and then return to the levels observed late in 1988. The predicted declines in real growth rates will come later but will be much more drastic for business investment than for consumption. However, the risk of a recession, as assessed by most of the respondents, is increasing but still not very high.

Growth Rates Declining in 1989, Low in 1990

The median forecasts of the annual growth rates in the economy's output were 4.4 percent for 1989:1, about 2 percent for 1989:2 and 1989:3, 1.1 percent for 1989:4, and 1.4 percent for 1990:1. Real GNP is expected to gain 2.7 percent in 1988-9, which is somewhat less than the forecast from the December 1988 survey, and 1.5 percent in 1989-90.

Thus 1989 is expected to make a strong entry but a weak exit. About one-third of the panel expect growth of less than 1 percent in 1989:4, including two respondents who predict that real GNP will decline. The situation is very similar for 1989:1. However, only one survey participant forecasts a recession severe enough to cause output to fall on an annual basis in 1989-90. Output is predicted to grow between 1.5 and 3.2 percent for 1989 and between-0.4 and 2.9 percent for 1990. (The standard deviations are 0.5 percent and 0.9 percent, respectively.)

Few See a High Likelihood of a Recession

The mean probability that real activity will fall, as estimated by the forecasters, increases from 14 percent in 1989:2 to 31 percent in 1990:1. These figures are somewhat higher than their counterparts in the previous survey. A few respondents see much higher chances of a recession, but most estimates fall below the means.

The rate of unemployment is expected to creep up to 5.6 percent in 1990:1 and 5.8 percent for 1990 as a whole, according to the group's median forecasts. The means are very close, the standard deviations are 0.3 percent in both cases, and the respective ranges are 5.0-6.2...