Diane C. Swonk
BANK ONE
NABE Vice President

Brian Horrigan
Loomis Sayles & Company, LP
NABE Policy Survey Writer

"...The majority of the NABE panelists neither expects nor prefers any change in monetary policy over the next six months...."

NABE Economic Policy Survey

March 1999

NABE Economic Policy Survey Highlights

• Seventy-five percent of the NABE panelists believe that monetary policy is "about right," compared to 82 percent last October. A mere 2 percent believe policy is "too restrictive," while 23 percent believe it is "too stimulative," the largest such percentage in the last four years. This shift in sentiment probably reflects booming equity markets, signs of recovery in Asia, and evidence of strong U.S. economic growth. The majority of the NABE panelists neither expects nor prefers any change in monetary policy over the next six months. Fifty-nine percent of the panel expect no change in short-term interest rates, while about equal numbers expect a small decrease or a small increase. This shift in sentiment since last October suggests that the 75 basis points of Fed easing since the last survey was satisfactory to most of the NABE panelists.

• A little over half of the NABE panelists believe that the stock market will rally further in 1999, in stark contrast to the attitudes expressed last October. About 25 percent believe the market will not slide substantially in the remainder of 1999 but neither will it rally to a new high. Only 11 percent believe the market will slide for the rest of the year, a substantial reduction in bearish sentiment from our October survey.

• Brazil gave up its attempt to peg its currency, the Real, to the dollar and permitted the currency to float. It subsequently depreciated sharply. We asked the NABE panelists what they thought would happen to Brazil’s economy. A small majority believes that Brazil will experience a severe recession. Very few thought that either Brazil would avoid recession or experience a massive collapse like Indonesia did. A slight majority thought that a Brazilian recession would create a "contagion" effect, in which Brazil’s South American neighbors would be forced into recessions also, but 34 percent thought such a contagion effect would be small or nonexistent. We asked the NABE panelists whether a South American recession, if one happened, would damage U.S. economic growth. Again, a slight majority thought a South American recession would slow U.S. growth but would not tip the U.S. economy into recession, and 38 percent thought it would have only a small impact. Finally, the NABE panelists are skeptical about the idea that Brazil would benefit from setting up a "currency board" which would rigidly link the Real to the U.S. dollar; only 27 percent endorsed the idea explicitly.

• The U.S. federal government ran a budget surplus in Fiscal Year 1998 for the first time since 1969. The majority of the NABE panelists believe the federal government will run an even larger surplus in Fiscal Year 1999, 40 percent believe it will run a smaller surplus, and only 2 percent believe the budget will sink back into a deficit. We also asked the NABE panelists how the budget surplus, assuming there is one, should be used. A huge majority (59 percent) of the NABE panelists prefers that the surplus be used to reduce the public debt and/or boost the Social Security Trust Fund. About 34 percent prefer to use the surplus for tax cuts, while fewer than 5 percent want greater federal spending.

• The current business upswing, which started in March 1991, will be eight years old in March 1999 and has already attained the status as the second longest upswing in U.S. history. If the expansion lasts past January 2000, it will surpass the 1960s expansion and become the longest U.S. expansion. Almost 80 percent of the NABE panelists believe that the current expansion will become the longest U.S. expansion, while only 13 percent do not believe that.

Most Serious Problem Facing the U.S. Today

"...The largest block of NABE panelists listed some aspect of federal government activity as the most serious economic problem facing the U.S. today."

In order to put these responses in perspective, the March 1999 survey responses are shown together in the table on the next page with those from our last survey from October 1998. The right-hand column shows the difference between the two periods, with a positive number representing a growing concern.

The largest block of NABE panelists listed some aspect of federal government activity as the most serious economic problem facing the U.S. today. Nineteen percent listed excessive growth in, or excessive size of, government spending or taxation as the serious problem, giving that problem the number one ranking. Almost 3 percent listed the design of the U.S. taxation system as the most important problem. And another 3 percent listed excessive or inappropriate regulation of the marketplace as the most serious problem. Only 2 percent listed the excessive size of the federal government debt as the most important problem, likely reflecting the fact that the government is running a surplus on a cash-flow basis. A few identified insufficient public infrastructure investment as the most serious problem.

Another looming federal fiscal problem relates to the unfunded liabilities of Social Security and Medicare, which have been a major concern of the NABE panelists in many past surveys. Far fewer of the NABE panelists listed it as the most serious problem in the October 1998 survey, probably because the immediate problem of the spreading global recession seemed more pressing. In the March 1999 survey, however, over 16 percent identified Social Security/Medicare as the most significant problem, making it the second-ranked problem.

The NABE panelists have shifted their concern greatly over the last six months when asked about "the most serious problem facing the U.S. today." In the October 1998 survey, the deepening crisis in Japan, the ongoing collapse of emerging markets in Asia, the financial meltdown in Russia, and the threat to Latin America made a deep impression on the NABE panelists, and an extraordinary 57 percent of the panelists identified some aspect of the world’s economic and financial crises as the most serious problem, up from 19 percent in the May 1998 survey.

Mar 1999

Oct 1998

Change

2.0

0.0

2.0

19.0

5.0

14.0

16.5

N/A

N/A

2.8

N/A

N/A

0.8

*

*

1.2

1.0

*

1.2

N/A

N/A

0.8

1.0

*

2.8

1.0

(2.0)

0.0

6.0

(6.0)

2.4

3.0

(0.6)

9.7

4.0

5.7

6.5

2.0

4.5

0.4

*

*

0.0

3.0

(3.0)

0.0

*

*

0.0

*

*

0.0

*

*

8.5

57.0

(49.0)

3.6

N/A

N/A

11.3

3.0

(7.0)

0.0

5.0

3.0

0.0

*

(5.0)

0.0

2.0

(2.0)

0.0

1.0

(1.0)

0.0

1.0

(1.0)

10.5

N/A

N/A

0.0

5.0

(5.0)

100.0

100.0

In the May 1998 survey, 10 percent of the NABE panelists warned of the danger than there may be a stock market "bubble" in danger of bursting soon, but few listed such a concern during the October 1998 survey, probably because the market declined so much in the Summer. In the March 1999 survey, however, 11.3% of the NABE panelists listed the danger of the stock market bubble and related financial market volatility as the most serious problem facing the economy, giving this problem a third-place ranking. This swing in sentiment is undoubtedly connected to the tremendous rebound in the stock market.

The perceived poor quality of the educational system and worker training, which also receded in significance in last October’s survey, re-emerged as a major issue; almost 10 percent identified it as the most important problem, giving it the fourth-place ranking. In a perhaps related issue, 6.5 percent of the NABE panelists listed growing inequality of income or wealth as the most important problem.

In the October survey, 6 percent of the NABE panelists listed lack of confidence in U.S. political leadership (the President or the Congress) as the most serious problem, in the aftermath of President Clinton’s grand jury testimony. However, not one panelist identified lack of leadership as the most serious problem in the March survey.

Consistent with the downward drift in the unemployment rate, over 2 percent of NABE panelists identified shortages of skilled workers as a problem. Not surprisingly, very few identified low level of job security as a problem.

Monetary Policy and the Fed

Prefer Monetary Policy To Be…

Expect Monetary Policy To Be…

25

12

63

75

12

31

Interest Rate Expectations

"...59 percent expect no change in interest rates."

Almost all of those who expect a decrease in interest rates believe that the decrease would not exceed 50 basis points, and almost all of those who expect an increase believe the increase would not exceed 50 basis points.

As in past surveys, we asked the panel about the slope of the yield curve, which many believe is an indicator of monetary policy, over the next six months. For example, an inverted yield curve (when short-term rates exceed long-term rates) is considered by many to be a leading indicator of a recession. Forty-five percent expect the slope of the yield curve to remain unchanged (compared to 37 percent in the October 1998 survey), 21 percent expect it will flatten (was 29 percent in October), and 34 percent expect it will steepen (same as in October). The shift in sentiment from a steeper yield curve foreseen last October towards an unchanged yield curve probably indicates a belief that the yield curve has moved back to a more normal shape as long-bond yields have increased while short-term interest rates have declined since the last survey.

The Stock Market

We asked the NABE panel to make a crude forecast of the U.S. stock market (as measured by the S&P 500 Index). A small majority (52 percent) believes that market will rally to new highs before the end of the year. By contrast, in the October 1998 survey, only 5 percent believed the market would rally to a new high before the end of the year. Almost 25 percent of the NABE panelists believe the stock market will be "flattish" in 1999, neither rallying to new highs nor sliding substantially. Only 11 percent were bearish, believing the market would slide this year. (Last October, 40 percent expressed bearish sentiments.) The remaining 12 percent did not know, gave no opinion, or did not respond.

Brazil

We asked the NABE panelists that if Brazil did fall into a recession -- which most believe will happen -- would there be a large "contagion effect," which means that Brazil’s neighbors in South America would also fall into a recession. A bare majority, 51 percent, thought that a large contagion effect would be likely, while 34 percent thought that effect would be small or nonexistent. Fifteen percent did not know, had no opinion, or did not respond. It seems that the NABE panelists are very divided and uncertain about the seriousness of contagion effects.

Finally, we asked the NABE panelists that if the Brazilian crisis created a recession throughout South America -- coming on the heels of Japan’s recession, the East Asian crisis, and the Russian meltdown -- would that cause economic distress for the U.S.A.? Fifty-one percent believe a South American recession might slow U.S. growth significantly, but not enough to cause a recession in the U.S. Thirty-eight percent thought a South American recession would have a relatively small effect on the U.S. economy, either because South America is not that large a trading partner for the U.S. or because the Federal Reserve would ease to offset the shock to the U.S. economy that a South American recession would cause. Only four percent believe that a South American recession would cause a U.S. recession. Six percent had no opinion, did not know, or gave no response.

A number of economists have suggested that Brazil and other emerging market economies could avoid the cycle of inflation, devaluation, high interest rates, and recession by establishing a "currency board," in which a nation’s currency is rigidly and forever linked to the U.S. dollar (or perhaps the euro or yen). With a currency board, devaluation is abandoned as a policy option, but domestic control of the money supply is also abandoned. We asked the NABE panelists whether they thought Brazil would benefit by establishing a currency board. Forty-six percent said they did not believe a currency board would work to Brazil’s interest, 27 percent said a currency board would be in Brazil’s interest, and 27 percent didn’t know, gave no opinion, or gave no response.

The U.S. Federal Budget Surplus

We asked the NABE panelists to give us their opinion on how the federal budget surplus should be used, assuming that, in fact, there is a surplus. A huge majority (over 59 percent) believe the surplus should be used to reduce the public debt and/or boost the Social Security trust fund. About 34 percent believe the government should use the surplus as an opportunity to cut taxes. But only a small number -- 4.4 percent -- believes the federal government should increase spending on projects it deems important. Two percent had no opinion or no response.

National Association for Business Economics
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Phone: 202-463-6223 • Fax: 202-463-6239