Take a look at the economic picture these days: Job gains are weak, the latest government indicators are consistently mixed, each week brings fresh revelations of corporate wrongdoing and the bears continue to dominate the stock market. So why do two of the most accurate economic forecasters believe that the economy has picked up speed and will continue to achieve solid growth through the end of the year?
James F. Smith, author of the Business Forecast at the University of North Carolina, explains his bullishness by the "middle American" perspective he has gained sitting hundreds of miles from Wall Street
Nancy R. Lazar, executive vice-president of the International Strategy & Investment Group, says she places her faith in the economy's historical truths as much as the latest data.
A bevy of forecasters, from Wall Street and elsewhere, are now estimating that the economy accelerated from a meager 1.1 percent annual growth rate in the second quarter to about 3.5 percent during the summer -- a healthy pace supported by the surge in mortgage refinancing at low rates, strong car sales and a drop in imports.
Still, the top economists at Wall Street's biggest investment banks expect those positive factors to dissipate by year's end, leaving the economy to lose more jobs and eke out growth of no more than 2 percent in the fourth quarter.
By contrast, both Lazar and Smith contend that the economy will continue to expand, advancing by at least 4 percent in the fourth quarter of the year. That is even more growth than tireless bulls like Bruce Steinberg of Merrill Lynch and Diane C. Swonk of Bank One have predicted.
If these more bullish analysts are right, that could mean an improving economic outlook in time for the congressional elections (the first report on third quarter growth is scheduled for Oct. 31) and perhaps a better holiday shopping season than many retailers are now anticipating.
Why pay attention?
But why should anyone pay attention to them? Because beyond having a consistently above-average record, Smith and Lazar (working with Edward S. Hyman, the ISI Group's chairman) have made some of the most accurate economic forecasts of anyone, anywhere, in the past six quarters. While almost every forecaster except the dedicated pessimists failed to foresee the recession, Smith and Lazar presciently predicted a drop in the rate of economic growth to 1 percent or less last year.
Looking ahead, Smith said he believes that Wall Street economists have overestimated the effect of the stock market's tumble and underestimated the effects of low interest rates on consumers' spending. The reason for the discrepancy, he claimed, is that Wall Street economists focus only on a very small but powerful cross-section of the economy.
"The Wall Street types are completely blown away by the decline in the stock market," he said. "Since they all have such a high proportion of their net worth tied up on stocks, they think everybody does."
The clients of the big Wall Street banks, he added, are not representative of the "real people" who drive the economy.
Smith's real people -- middle-class consumers -- will do more than enough to keep the economy growing at a speedy clip, he predicted. Many more families own their own homes, he pointed out, than own a share of stock or mutual fund directly. Smith said he could conceive of homeowners refinancing their mortgages at lower interest rates and then buying cars with zero-percent financing, perhaps leaving their total monthly payments unchanged.
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