Now is the time to own up to my forecasting failings and
acclaim my successes from the previous year.
Actually, the only people who knowingly forecast 2001 correctly must have
attended one of Osama's terrorist
camps. September 11 did have a
significant impact upon the economy. We
would still be debating whether a recession had developed if not for that attack
and its impact upon economic decisions.
Therefore, I am not ashamed that I assumed interest rates would fall less than
they did or that stock values eroded more than I had thought.
External factors, not economic analysis failings, were responsible for
some of the shortfalls in determining the dimensions of our economic problems.
I am proud that I talked about fears of a "perfect" recession last
year. I was worried about excess
inventories and lost stock market wealth combining to create a serious shortfall
in economic expenditures. However, I
did not understand how much weakness already had developed before the Federal
Reserve finally decided to shift policy.
I talked about the inventory and consumption problems but failed to realize the
direct damage that speculation had done to capital spending allocations.
A stalling economy simply could not justify capacity growth at 5 percent,
the growth rate that still was occurring late in 2000.
I also failed to realize how much competitiveness would be lost as the dollar
continued to improve in value against other currencies.
I had assumed the dollar would lose value.
I never thought that despite rising trade deficits, international
investors would find no alternative to the greenback.
Probably my largest error (other than failing to anticipate the September
disaster) was in assuming that Federal Reserve policy was less restrictive at
the beginning of last year than it was. I
was cheered by the January 3 reduction in rates but should have been chagrined
that rates still were 3.5 percent points above inflation even after that action.
Yes, the Federal Reserve moved aggressively once it decided to move.
However, they were still on the brakes until April while almost all
analysts, including myself, assumed that they were pumping gas.
I will not soon make that mistake again.
Should I be happy that my 2 percent forecasted growth was a full percentage
point below the consensus as the year began.
Or should I be apologetic that I over-shot actual growth by a full
Should I applaud myself for chastising Wall Street analysts for assuming profit
growth, or should I lower my head for assuming profit declines would be only
half what they actually turned out to be?
I was surprisingly close on long term government interest rates, which closed
the year near the 5.5 percent that I had assumed last January.
And readers of my column clearly were aided by my announcing in October
that the 40 year lows in mortgage rates were a gift that should be accepted with
all due speed.
Moreover, I did see fear in the eyes of stock traders that fateful Friday after
stock trading had resumed following the terrorist attacks.
While I may not have said it in a column, I did tell several audiences
that this was the climactic end to the stock market sell off.
That may have been my best call of the year.
On the other
hand, my projection of a 12500 Dow was not realistic and I cannot believe that I
thought Nasdaq could return to 3000 so quickly.
My 11500 and 2400 estimated highs for 2002 appear much more justified.
Moreover, I did not believe that the Federal Reserve would run so hard to
eliminate the problems its restrictive monetary policy of the previous year had
partially created. In my wildest
dreams, I could not fathom a prime interest rate below 5 percent.
Having reviewed my successes and failures, how should I be graded and what
should be learned from this forecasting exercise?
If the grade should be on whether I predicted correctly, then I can claim no
higher than a low C. But there were
mitigating circumstances. No one
foresaw those planes crashing into American landmarks on September 11.
If the grade should be based on understanding the economic risks, I certainly
deserve partial credit. I identified
some of the economic risks and
foretold the direction of all major economic variables except the value of the
dollar. That certainly is worth a
I also learned that monetary policy is potent but delayed.
Some of my colleagues do not think it is potent, but they fail to realize
that policy was restrictive until well into 2001.
Finally, I will look more closely at all the internal dynamics of the economy.
The collapse of wealth had a larger direct impact upon capital spending
than I expected. Policies abroad
undermined some of our stimulus at home. Japan
could not complement our policies and Euro land chose not to.
How could all of that stubbornness be predicted?
What an interesting time to be an economic forecaster.
But the Chinese tell us that interesting times are a curse.