. . .While the Pessimist Was Way Off the Mark

Journal Record, The (Oklahoma City), Jan 4, 1995 by Lous Uchitelle

By Louis Uchitelle

N.Y. Times News Service

None of the nation's most prominent forecasters was more pessimistic about what 1994 would bring for the American economy than Irwin L. Kellner, senior economic adviser at Chemical Bank. "Everything pointed to weakness," he recalled recently.

Kellner said he thought a year ago that the Clinton tax increase for the wealthy would inhibit spending among the rich, and that would have a ripple effect on the less affluent. Neither happened.

Kellner also thought low inflation would hold back spending. After all, why hurry to buy to beat price increases if none is on the horizon? People bought anyway. And he never dreamed that the money many homeowners saved by refinancing their mortgages would be spent so lavishly on consumer goods.

In retrospect, Kellner said, he underestimated the power of low interest rates and plentiful credit, not to mention the pent-up demand for new cars to replace aging vehicles and the cleverness of the auto manufacturers in designing leasing plans to move cars from showrooms to the nation's garages.

Finally, European economies recovered more strongly than Kellner had expected. As a result, Europeans bought ever larger quantities of American goods. A weak dollar helped by making United States goods more competitive in price.

"In sum, whatever could converge to boost the economy in 1994 converged, including the California earthquake, which resulted in billions of dollars in spending for reconstruction," he said. "But anyone who was right about the economy in 1994 was right for the wrong reason. We were wrong for the right reasons."

Kellner, who is, as he put it, "always on the lookout for what could upset the apple cart," decided a year ago that 1994 would produce a rise in the nation's output of goods and services of only 1.7 percent.

Among the 50 forecasters surveyed by Blue Chip Economic Indicators in December 1993, his estimate of the growth in gross domestic product was the lowest. Even the most optimistic forecasters, however, fell short of the approximately 4 percent that has turned out to be the actual growth rate in calendar 1994.

The average forecast of 2.9 percent growth was way off the mark as well. But the Blue Chip forecasters, as a whole, were much closer to the actual 2.6 percent inflation rate this year. Kellner gave the low-ball estimate there too: 1.5 percent.

All of the forecasters were in the same boat on one point: none expected the Federal Reserve to raise interest rates as much as it did.

The expectation that jobs and incomes would stagnate shaped Kellner's thinking. This has been a successful theme of his for years. Like a modern-day Cassandra, Kellner was almost alone in the late 1980s in forecasting the recession that finally appeared in the summer of 1990. And that summer, Kellner was among the first to recognize that a recession had begun. He urged the Federal Reserve to ease up on interest rates, which it finally did in the early fall.

"For the first year of this recovery, employment declined and the unemployment rate kept rising," he said. "I was impressed with the lack of job creation in 1992 and 1993, and I was also impressed with the low quality of pay. But people are sophisticated; they have found offsets, although one wonders how long they can continue to do so."

All of which brings Kellner to 1995. His forecast is for economic growth of 2.5 percent to 3 percent, which puts him close to the consensus forecast of 2.9 percent in the Blue Chip survey.

"The economy has a lot of momentum," Kellner said, "and we don't think the Federal Reserve will create a recession by raising interest rates too much. In this case, we are optimistic in our forecast that the Fed can engineer a slowdown."