South-Western College Publishing - Economics  
Rocky (?) Road to a Record
Subject Economic Growth, Forecasts
Topic Productivity and Growth
Key Words Gross Domestic Product, Inflation, Unemployment, Recession, Economic Growth
News Story

Last year at about this time, economic forecasters were predicting that economic growth for the U.S. economy would slow. How accurate were these forecasts? Despite a year of turbulence, the U.S. economy performed very well in 1998. The economy grew at nearly 4 percent for the third year in a row, unemployment rates were the lowest in almost 30 years and there was little inflation. Forecasting season is here again and the forecasters are once again predicting slower growth.

Typical forecasts for growth in Gross Domestic Product (GDP) for 1999 are 2.1 percent, about half of last year's growth. Consequently, the unemployment rate should rise to 4.8 percent. Inflation is projected to increase by 2.3 percent, slightly higher than the 1.6 percent increase for 1998. Real wages should continue to rise, as nominal wage increases exceed inflation. Some forecasters are more optimistic and some more pessimistic, but relatively few believe that a recession in imminent. If 1999 is a year of economic growth, then the current expansion that started in April 1991 will be close to becoming the longest in American history. To break the record for economic expansion, the economy must continue to expand until early in the year 2000.

Forecasts for slower growth point to the manufacturing sector, which has been hurt by declining export demand and falling commodity prices. The decline in exports has widened the U.S. trade gap. Increased consumer spending has countered this drag on the economy. Strong job and income growth and the positive wealth effect from the stock market were responsible for increased consumer spending.

All forecasts have question marks. The biggest question mark in the 1999 forecasts is the impact of reduced world economic growth on the U.S. economy. The Asian economies are still in recession and Brazil, Argentina and Chile could possibly be headed for economic downturns. If a number of Latin American countries were also to have a recession, this might have a significant impact on the U.S. economy.

(Updated February 1, 1999)

Questions
1. What is a recession? What happens to government receipts and expenditures during a recession?
2. What happens to employment and unemployment when economic growth declines?
3. What happens to inflation during a recession?
4. If Brazil, Argentina and Chile were to have significant economic downturns, what would be the likely impact on U.S. exports and imports?
Source John M. Berry, "Forecasters Predict Slow Growth -- Again", The Washington Post, January 2, 1999.

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