NEW YORK — Pity the poor economic forecaster. Every year since the 1981-82 recession, the consensus forecast consistently underestimated the strength of the U.S. recovery, or worse, wrongly predicated a recession. Finally, in 1986, economists across the land screwed up their courage to forecast booming growth. As if on cue, the economy stagnated, and the forecasters are once again suffused with gloom.
Economists might be forgiven their lapses--except perhaps by clients who pay so well for false certitudes--because the underlying facts warrant confusion. There are good reasons to expect the economy to strengthen markedly over the next six months or so. There are also almost equally good reasons to anticipate a stupendous collapse.
The best news, perhaps, is that the American recovery, already one of the longest in peacetime history, is still underway. Employment is growing; unemployment figures continue to show a downward trend, slipping under 7% for the first time in years. The disappointing 1.1% annual growth rate in the second quarter looks like more of an accomplishment when measured against the sharp downturn in Japan (-2%) and the near-collapse in Germany (-6.5%) during the same period.
There's good reason, too, to expect better news on the manufacturing front, which has been the major drag on the rest of the economy as oil companies, automobile companies and manufacturers of consumer durables--washing machines, refrigerators and the like--slashed budgets for new plant and equipment. Business investment is a basic economic driver, adding steam to basic industries like steel and rubber. More modern factories raise productivity and help America compete overseas.
The reasons for the cuts in oil company spending are obvious. But the capital spending slowdown in the rest of the manufacturing sector was truly unexpected. With the sharp fall in the dollar, most companies had expected a quick reduction in imports--a cheaper dollar raises the cost of foreign goods--and a boom in domestically manufactured goods. Instead, Japanese and German companies held their prices and took a beating on profits, suffering their own mini-recessions in order to keep their American market shares.
The good news now is that foreign manufacturers can't hold the price line much longer. A number of analysts, in fact, think an abrupt turn in trade flows may be already underway, but has yet to show up in the official statistics. One straw in the wind is the feverish activity by Japanese companies as they move factories to the United States, making everything from automobiles and refrigerators to television sets and computer disc drives.
If the trade numbers do turn, business investment could recover smartly. Investment should also get a boost once the details of the tax bill are settled--any tax bill, just to remove the uncertainty. The Congressional Budget Office, for instance, no admirer of the Reagan Administration's typically rosy forecasts, is predicting just that--growth and moderate inflation.
For connoisseurs of pessimism, however, there is truly dreadful news in the two sectors that have been propping up the economy for at least the last decade--agriculture and finance. For a long time, America has been the Saudi Arabia of food. It is not entirely coincidental that American wheat prices tripled at about the same time as Arabian oil prices, nor that world food supplies have moved into glut the way oil stocks have. Market forces and price mechanisms do work, however imperfectly.
There is no way out for the American farmer now. Feed grain supplies at the end of the year will be four times higher than two years ago, even with a 15% cut in output. The tight grain markets of the late 1970s impelled vast new production all across the world, from India to Argentina. Plenty of American farmers--and not just little farmers--will have to go bankrupt and quit before agriculture can return to profitability.
The agricultural collapse is becoming increasingly difficult to muffle. The Farm Credit System--a patchwork of federal land banks and farmer cooperatives--has some $66 billion in paper floating in the secondary financial markets, about $5 billion of it in bad loans. Band-Aid congressional legislation has been deferring a reckoning, but the longer the bad debts are allowed to mount, the taller and more vulnerable the whole haystack becomes.
Exuberant farm lending is only one of the last decade's banking follies that are straining the big commercial banks; real estate, developing countries and oil-patch lending are the others. But so far, except for critical cases like Bank of America, falling interest rates have masked their weaknesses.