Top forecasters (slightly) more optimistic for 2010

Each year, the W. P. Carey School evaluates the annual accuracy of projections from the 50 national economists that contribute to the consensus forecast reported monthly in Blue Chip Economic Indicators. Based on the School's tabulations, the most accurate forecaster is presented with the prestigious Lawrence R. Klein Award, named after the Nobel Prize winner and eminent economist. From time to time, it is useful to see what these past forecast award winners are saying about the economic outlook. For 2010, the accuracy award winners seem somewhat more optimistic than the current Blue Chip consensus.

Each year, the W. P. Carey School evaluates the annual accuracy of projections from the 50 national economists that contribute to the consensus forecast reported monthly in Blue Chip Economic Indicators (Aspen Publications, New York). Based on the School's tabulations, the most accurate forecaster is presented with the prestigious Lawrence R. Klein Award, named after the Nobel Prize winner and eminent economist.

(The 2009 Klein Award will be presented by the W. P. Carey School on October 21, in New York City. Guests at the presentation ceremony are welcome, although a reservation is required. If interested, contact lee.mcpheters@asu.edu.)

From time to time, it is useful to see what these past forecast award winners are saying about the economic outlook. For 2010, the accuracy award winners seem somewhat more optimistic than the current Blue Chip consensus, which is calling for an increase of 2.0 percent in Gross Domestic Product (GDP). Seven of the 12 active Klein Award winners have GDP growth projections above the consensus, while five are forecasting weaker growth.

Four of the five very highest growth forecasts for 2010 come from Klein Award winners. The most optimistic forecast of all Blue Chip contributors is Comerica Bank, winner of the Klein Award in 2003, with a projection of 4.6 percent growth, more than double the consensus.

The 2007 winner, ClearView Economics, has a GDP growth forecast of 3.2 percent, followed by former winner (1997) Ford Motor Co. at 3.0 percent. The average GDP growth forecast for 2010 from the seven most optimistic Klein Award winners is 3.0 percent, one full point above the consensus.

But even at 3.0 percent growth for 2010, the recovery still would be weaker than most past rebounds from recession. The current contraction compares with the recession of 1981, the last time GDP actually declined (-1.3 percent). In the following recovery year 1982, GDP grew by 7.7 percent, more than triple the growth rate projected by the Blue Chip consensus or the W. P. Carey Round Number Forecast (below) for the recovery in 2010.

W. P. Carey Forecast

The Round Number Forecast for GDP and components from the W. P. Carey School of Business is updated at the mid-point of each month. The current (June 15) forecast projects real GDP will contract by 3.0 percent in 2009 and grow by 2.0 percent in 2010 (See table at Economy@W. P. Carey).

With the exception of Federal Government spending, every key component of GDP is expected to decrease in the current quarter (Q2). Consumer spending, the largest single component of GDP, will decline by 1.0 percent. Spending on residential building will fall by 25 percent, marking the 14th consecutive quarter of decreases.

While residential building is projected to record positive growth by the end of the year, spending on nonresidential structures (such as retail, office space and industrial buildings) will decline throughout 2009 and 2010. The Q1 decrease of nonresidential building of 42.3 percent was the largest quarter-to-quarter dip on record for this component.

With the exception of nonresidential building, the key components of GDP are projected to bottom out in Q4 of this year. Business spending on equipment and software fell by more than 30 percent in Q1, but is expected to return to positive growth as industrial production recovers and businesses look to expand output, albeit modestly.

Exports and state and local government spending are likely to add next to nothing to the rebound. Past recoveries have typically included at least one or two quarters of growth in consumer spending of 5 percent or more. Such a surge in spending is not foreseen for the rest of 2009 or in 2010. The combination of high unemployment, high debt levels, and falling home prices will keep the consumer subdued.

With the consumer contained, business cautious about expansion, exports restricted by a weak global economy, and state and local governments worried about budgets, the recovery seems destined to be drawn out over two to three years of slow growth, accompanied by relatively high levels of unemployment and weak job creation.