Buying ranks suggest big slowdown
By Staff -- Purchasing, 8/10/2000 2:00:00 AM
After a surprising twist last year-when purchasing pros were more optimistic in their economic outlooks than professional analysts-the buying ranks have resumed their more traditional curmudgeonly stance.
While the professional (Blue Chip) consensus forecast for real GDP has settled at 4.8% for 2000, returns from Purchasing's Crystal Ball economic forecast contest yield a consensus growth forecast of only 4% for real GDP.
Because the economy grew at a blistering annual rate of 5.4% in first quarter 2000, this lowball annual forecast from buyers implies substantial economic slowdown in the latter part of the year. Mathematically speaking, the economy would have to grow at a rate of just 1.4% in quarters two and three and less than 1% in quarter four to make the 4% outlook come true. By contrast, the professional consensus assumes more generous 3%-4% growth rates for quarters two through four.
The difference between the Blue Chip and Crystal Ball outlooks is probably one part naivete to three parts relative pessimism on the buyers' side. Adjusting for the fact that some unknown subset of the entry pool simply threw a handful of darts at the wall, while another group relied on early (highly changeable) professional forecasts to guide them, the gap between buyers' and professional forecasts begins to shrink-somewhat. An aggregation of 2000 forecasts from past and repeat contest winners plus a core group of entrants with a history of placing in the Top 50 (the "Top 50 denizens") yields a slightly higher real GDP consensus forecast of 4.2% for 2000.
At the same time, uncannily accurate two-time winners Frank Ruane of the Ohio-based Olympic Steel and Wayne Balsiger of paccar Automotive are both more optimistic than even the professional consensus for 2000, with Ruane predicting a 4.9% growth rate for real GDP and Balsiger going for 5%. As Ruane sees it: "Things have been very strong. With five and a half percent growth in the first quarter, it's difficult to see the quarterly economic growth rate falling much below 4%."
Noting that he's not speaking on behalf of his company (paccar), Balsiger explains his extreme optimism: "I think the Fed is done raising interest rates and consumer spending is continuing to drive GDP fast. The economy grew 5.5% in quarter one. Even with some slowing, I think we're going to see 5% growth in 2000."
To explain the low buyers' consensus, Balsiger says, "I suspect that some entrants may have put a slowing economy against the actual 1998 and 1999 figures on the entry form."
Here are the consensus highlights-
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Inflation- Continuing last year's reversal of traditional roles-whereby the amateur consensus is typically less sanguine about inflation than the professionals-the 2000 buying consensus for the consumer price index (CPI) comes in at just 2.5%, compared to a professional consensus of 3.1%. Top 50 denizens put the CPI at 2.7% for 2000 while Balsiger and Ruane stand with the professional consensus at 3.1% and 3.0% respectively.
As to the potential impact of crude oil pricing on retail pricing of finished goods, Balsiger is sticking to his belief that "oil prices don't filter much into other prices until they've been elevated for 18-24 months (except on fuel-intensive products or services such as air travel.)" Nonetheless, he says, "The CPI is definitely affected by oil prices. That's why I'm on the high side at 3.1%. I don't see oil prices dropping as fast as some had hoped. So far, opec has been unable to keep oil below $25 a barrel as promised." Ruane observes that, "In first quarter 2000, the CPI was the highest it has been since 1995, and that was before the peak in gasoline prices."
As for the core wholesale price index (PPI), both Purchasing's total entry pool of forecasters and the Top 50 denizens pool settle on 1.8% for the year. There's no professional consensus for this data series, but it's interesting to note that Balsiger and Ruane differ substantially with Balsiger putting the core PPI growth rate down at 1.4% for 2000 compared to Ruane's 2%.
"Most of the inflation news this year is crude oil, and that's not in the core rate," Balsiger says. "The core PPI continues to increase only about 0.1% a month. In May it was up 1.4% from May 1999. I expect this pattern to persist. Unit labor costs are another factor keeping inflation low. Unit labor costs for durable goods manufacturing have fallen each year since 1991 to a level that is only 77% of 1992 costs." While some commodity prices have increased, both purchasers and productivity growth are reducing the impact on finished goods pricing, Balsiger says. "We may see margins erode somewhat."
Ruane, who is less optimistic about the core inflation rate, remarks that "Producer prices have been rising at a faster rate since 1997, and I don't see 2000 breaking this trend."
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Consumer spending- All of the various forecasting pools-total entry, Top 50, repeat winners and professional-are well aligned on consumer spending. After running at a remarkable 7.8% annual rate, most forecasters think this rate will be halved to the 3%-4% range for the latter three quarters with perhaps a downward progression as the effects of higher interest rates continue to kick in.
"There's been significant slowing from first quarter," Balsiger says. "I always pay attention to the number of newly registered cars I see on the road and in parking lots. They're easy to spot with temporary tags, and one can roughly judge the quantity of cars being sold. There have been few times in the past several years when the numbers of new cars has seemed to subside."
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Capital spending- Last year, the total Crystal Ball consensus was much more optimistic than Blue Chip on the capital spending front. This year, the reverse is true with buyers showing far less optimism. Where the pros are looking for nearly 11% growth in business spending for new structures and equipment (both Balsiger and Ruane are even higher, predicting 12.5% and 12% respectively), the larger purchasing pool is forecasting just 8.9% growth and the Top 50 group is down at 9.3%.
Compared to first quarter, when business investment soared at an improbable 25% rate, the Crystal Ball consensus forecast assumes a sharp slowing in capital spending (perhaps 2% in quarter two, 1.5% in quarter three, and less than a percent in quarter four). To get to 10.8%, the professional consensus sees annualized growth rates in 6%-7% range through each of the last three quarters of 2000. To hit the 12% range, as Ruane and Balsiger are predicting, the economy will have to see at least one more quarter of double-digit growth rates, followed by a couple of 6% quarters.
"Except for industrial equipment," Ruane observes, "spending is still strong. Computers and communication are very robust and spending here is much less deterred by higher interest rates." Balsiger agrees: "Technology spending continues strong and this bodes well for productivity improvements to continue."
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Trade- Among the various consensus groups, import growth forecasts for 2000 are pretty much in line. The Crystal Ball pool sees 11.8% growth this year vs. 11% for the pros, 12% for the Top 50 group and roughly 11% from both Balsiger and Ruane. Balsiger remarks that "imports look like they are finally slowing, unlike last year when I thought they would, but in fact grew faster than 1999."
Exports are another matter. While the professional consensus anticipates a healthy 8.3% rate (Balsiger is at 8.4%, Ruane is at 8%), the total Crystal Ball entry pool predicts 2000 export growth down in the sub-4% range. The Top 50 group is only somewhat more optimistic about export strength, putting the outlook at 4.7% for 2000.
"Healthy exports are overshadowed by the massive trade deficit," Ruane says. "Despite the strong dollar, that is causing imports to accelerate and the trade deficit to expand, exports are rebounding along with other world economies."
Balsiger says much the same thing: "The world economy is growing faster than 1999's 2.8%. I started with an export-forecast range of 6.8%-8.2%. Growth in Europe and a recovery in Japan caused me to go with the higher 8.4% figure." Observing that his forecast is on par with mid-90's annual growth rates, Balsiger says, "I also under-predicted export growth last year, and didn't want to repeat the error."
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I ndustrial production- Here too, the total Crystal Ball entry pool is substantially less optimistic than the Blue Chip consensus, predicting a 3.8% growth rate for 2000 vs. 5.1% from the pros. Balsiger and Ruane also differ substantially on this point. Ruane says 4.2%, in line with the general purchasing consensus, where Balsiger sides with the pros, even higher, at 5.3%.
Ruane notes that, "While growth of industrial manufacturing has slowed considerably, technology-related manufacturing continues to drive growth." As Balsiger sees it: "IP was very high during the first five months of 2000. I expect it to slow during the balance of 2000, ending up at 5.3%-5.5%."
Consensus forecasts compared
| Real GDP | GDP chain price index | Cons. spend | Bus invest. | Imports | Exports | Core PPI | Consumer price index | Total indust. prod. | Mfg. capac. utilization | Prime rate | Unemplymt rate | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|
Consensus, total entry pool |
4.0 |
1.5 |
5.3 |
8.9 |
11.8 |
3.8 |
1.8 |
2.5 |
3.8 |
80.0 |
8.6 |
4.2 |
Low, total entry pool |
2.2 |
1.0 |
2.0 |
1.0 |
1.1 |
1.8 |
0.2 |
1.4 |
0.4 |
72.1 |
7.5 |
2.2 |
High, total entry pool |
5.2 |
3.0 |
8.3 |
15.3 |
16.3 |
10.6 |
3.3 |
7.0 |
5.7 |
92.3 |
10.0 |
6.7 |
Top 50 denizens* |
4.2 |
1.7 |
5.2 |
9.3 |
12.0 |
4.7 |
1.8 |
2.7 |
4.2 |
80.7 |
9.1 |
4.2 |
Balsiger |
5.0 |
1.9 |
5.3 |
12.5 |
10.9 |
8.4 |
1.4 |
3.1 |
5.3 |
81.1 |
9.3 |
4.1 |
Ruane |
4.9 |
1.8 |
5.0 |
12.0 |
11.2 |
8.0 |
2.0 |
3.0 |
4.2 |
81.2 |
9.5 |
4.0 |
Weyker (1999 winner) |
4.6 |
1.4 |
5.6 |
13.5 |
12.2 |
3.6 |
1.8 |
2.8 |
4.2 |
80.1 |
8.9 |
4.1 |
Professional |
4.8 |
2.1 |
5.2 |
10.8 |
11.0 |
8.3 |
n/a |
3.1 |
5.1 |
n/a |
9.4 |
4.0 |
* Adam, Balsiger, Beyreis, Bidwell, Bollnow, D'amico, Greinke, Haring, Katsaros, Maccaux, Mann, Miller, Neidhardt, Ruane, Schalk, Schirmer, Spidle, Weyker.
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