Third quarter 1989.

• Author: Zarnowitz, Victor
• Position: Economic outlook survey

Third Quarter 1989

Victor Zarnowitz

According to the September survey of 15 professional forecasters taken by the NBER and the American Statistical Association, real GNP is expected to grow by 2.7 percent this year and 1.7 percent in 1990. Inflation as measured by the consumer price index (CPI) is forecast to fall from 5.1 percent in 1988-9 to 4.7 percent in 1989-90. Short- and long-term interest rates also are predicted to be lower on average in 1990 than in 1989.

Views on Recession and Unemployment: Divided but Stable

There is little change from the previous survey in the estimated probabilities of a recession. The mean estimates of the probability that total output will decline are 12 percent, 17 percent, 23 percent, 29 percent, and 29 percent for the five successive quarters 1989:3-1990:3. They are skewed to the right: that is, the medians are smaller than the means. The interquartile ranges shift upward from 0-15 percent for 1989:3 to 10-38 percent for 1990:3. In sum, a few forecasters see the likelihood of a recession in the year ahead as rising to a relatively high level, but most do not.

Most forecasters see the unemployment rate as increasing slightly. The medians are 5.4 percent for both 1990:3 and 1990 as a whole; the means are slightly higher. The ranges are 5.0-6.2 percent for 1990:3 and 5.1-6.5 percent for 1990.

Somewhat Lower Inflation Expected Next Year

The median forecast of the GNP implicit price deflator (IPD) is 4.4 percent in 1988-9 and 4.3 percent in both 1989-90 and 1989:3-1990:3. In terms of the CPI, inflation rates are expected to average between 4.3 percent and 4.7 percent in 1989:3-1990:3. Most of the individual predictions fall between 4 percent and 5 percent, with the outliers near 3 percent and 6 percent.

The mean probability distributions of relative changes in IPD exhibit persistent and high uncertainty about inflation in 1990. However, the following table indicates a moderate decline in inflation forecasts since the June survey.

A Short-Lived Slowdown and Uncertain Improvement

The median forecasts of the annual growth rates in the economy's output are close to 1.6 percent for 1989:3, 1989:4, and 1990:2; 0.8 percent for 1990:1; and 3.2 percent for 1990:3. There are only three single-quarter declines among the individual predictions and no declines of longer duration. The record shows that expectations of sluggish growth (below 2 percent annual rate) prevail for the second half of 1989, but that gradually they...