NCPA - National Center for Policy Analysis

Forecasters Blindsided By Economy's Surge

April 9, 1998

There are a lot of red faces among U.S. economic forecasters. Many missed signs during the past two years that the business boom would continue.

Now their ranks are split between those that see the current expansion as a fluky confluence of positive events and those who believe that the very nature of the U.S. economy has changed to allow higher growth, lower unemployment and less inflation.

  • As of the end of 1996, the typical economist was predicting inflation would post a 3 percent gain in 1997 -- but the actual rate was just 1.9 percent.
  • Real gross domestic product was projected to creep up only 2.2 percent -- but the actual gain was 3.7 percent.
  • Many forecasters believed the Federal Reserve would be forced to raise interest rates and slow the economy when the jobless rate hit 5 percent last April -- but unemployment is now 4.7 percent, with no signs of inflation.
  • Many economists were surprised by the seemingly endless expansion of the labor force -- thanks to welfare reform and the return of people who had given up looking for jobs.

Many forecasters also minimized the importance of deeper economic changes -- particularly deregulation of the trucking, telecommunications, financial services and air travel industries. Freeing up these industries forced companies to become more competitive and more efficient, analysts say.

Finally the positive effects of years of investment in technology are beginning to pay dividends in the form of improved productivity. Forecasters had been watching in vain for years for this effect to show up. Now there are definite signs of its impact.

Source: Michael M. Phillips, "Economists Prove Weak Fortune Tellers," Wall Street Journal, April 9, 1998.


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