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Thursday December 21, 10:07 am Eastern Time

YEARAHEAD-Fearless forecast: Wall St forecasts to fail

By Daniel Sternoff

NEW YORK, Dec 21 (Reuters) - Economics has been called a dismal science, and Wall Street's best and brightest showed why this year.

As the soothsayers of world finance collect their year-end bonuses and condense a deluge of data into forecasts on which fortunes will be made and lost in 2001, one statistic stands out from the stack: the seers stumbled badly in 2000.

When it came to the mother of all indicators -- the pace of growth in the world's largest economy -- Wall Street forecasters fell wide of the mark.

A Reuters poll conducted late last year found major financial houses expected the U.S. economy, riding the crest of a nine-year expansion, to expand by 2.8 percent in 2000 after posting Gross Domestic Product (GDP) growth of 4.2 percent in 1999.

NOT SO SLOW...

But the economy blistered ahead in the first half of the year before a year of Federal Reserve interest rate hikes finally slowed things down in the third quarter, when year-on-year GDP still stood at 5.3 percent.

The figure for all 2000 is expected to fall solidly below 5 percent once a cooler fourth quarter has been factored in, but is still a statistical league apart from last year's conventional wisdom.

``It's funny. I never really focus on what we said a year ago,'' said William Dudley, chief U.S. economist at Goldman Sachs & Co.

He now predicts that sliding consumer confidence, high energy costs and tight financial conditions will lead to substantial weakness in the economy in the first half of 2001, before easier fiscal and monetary policies perk growth back up.

``You can imagine a 2001 that was weak as a whole but an economy that is accelerating by year end,'' Dudley said.

Several of Dudley's peers also winced when reminded of their predictions of a year ago, but most salvaged their calls by pointing to a sharp cooldown in growth in the second half of 2000.

``The forecasting wasn't dead-on. But for many who were wrong, it was a question of timing. A slowdown did arrive. It just arrived kind of late,'' said Peter Kretzmer, senior economist at Banc of America Securities LLC.

A FLY IN THE FORECAST

What clouded the crystal balls? Chalk it up in part to a millennial frenzy over the destructive potential of the Y2K computer bug.

The thought was that stockpiling of inventories and heavy spending on computer systems in late 1999 would depress growth in 2000, and that widespread computer failures could further jolt the economy.

In retrospect, the main victims of the ultimately benign Y2K bug were the forecasters of gloom and doom.

A flood of liquidity pumped into the monetary system by the Federal Reserve to prevent any Y2K credit crunch instead added fuel to an economy already firing on all cylinders.

``Money-based data was flying through the roof,'' said Alan Ruskin, research director at 4Cast Ltd in New York.

``I think the equity bubble, in particular the Nasdaq, extended further than people anticipated. It went through another three months of inner ecstasy before we really hit a roadblock in the second quarter,'' he said.

FOLLOW THE HERD

Like predicting the weather a year in the future, gauging the economy is no mean feat.

Where ancient soothsayers would split open a goat's belly to augur the future on the animal's entrails, today's economists have powerful computers crunching spools of data -- an improvement no doubt, but far from perfect.

``It is a very tough situation. The amount of information processed these days is very different from five to ten years ago,'' said Steve Ricchiuto, chief U.S. economist at ABN Amro in New York.

``The Fed has done studies that say all the data doesn't make forecasts more accurate. Maybe near-term forecasts have gotten better, but longer-term forecasts have suffered,'' he said.

But investors are demanding more and more detailed forecasts and will punish underperformance.

What's a guru to do?

``If we are more right than the consensus, we are going to be fairly happy. That's how I think about it,'' said Goldman's Dudley.

Banc of America's Kretzmer put it another way: ``Either we're all smart or we're all stupid.''

For the record, the experts polled by Reuters last week predicted the U.S. economy will expand by 2.8 percent in 2001.

-- (in@economic.news), December 24, 2000

Answers

A friend who was a weatherman in the Air Force told me told me that if you forcast tomorrow being like today you'll be statisically right a more than if you tried to really forecast.

Happy Holidays!!!

-- Flash (Nazflash@northlink.com), December 24, 2000.