Crystal Ball Readers, They’re Not : Economic Forecasters Say Their Jobs Require Analytical Skills, Willingness to Play a Hunch, Humility--and a Very Thick Skin

Forecasting the economy can be a lonely business. Just ask Larry J. Kimbell.

The UCLA professor still looks pained when he recalls the time he warned California Gov. Jerry Brown of a recession. Brown--who had hoped for a favorable forecast to back up his spending plans--was disappointed.

He responded with a pointed question: Did Kimbell want university faculty members to have a pay raise that year?

“It was kind of traumatic to go through an experience like that, to feel like I was in such danger of being wrong,” he recalled in an interview. “Even today some of my colleagues say you’re an idiot if you don’t go with the consensus.”

As it turned out, Kimbell’s warning to Brown proved accurate. But in his field, it’s easy to be wrong: The bespectacled academic, 50, is among a handful of those whose job is to predict the erratic course of the California and national economies.

The job requires sophisticated analytical skills, the willingness to play a hunch, loads of humility and a very thick skin.

“People would love for us to tell them what the future is going to be. We can’t do that, and we don’t pretend to,” said Kimbell, a soft-spoken native of Texas, who is director of UCLA’s Business Forecasting Project. “What we’re trying to do is help people face uncertainty honestly.”

Assign Economist

For all the uncertainty, many corporations, builders, realtors, investors and public officials are acutely interested in what Kimbell and his counterparts have to say.

Business executives who negotiate contracts want to know the pace of inflation. Employers, setting next year’s salary levels, seek insight into next year’s economy. Furniture makers desire hints about housing activity.

To meet these needs, major banks, such as Security Pacific, First Interstate and Bank of America, typically assign an economist to follow California’s fortunes. They then offer their findings to clients as a service.

Perhaps California’s best-known forecasting program, however, is that at UCLA. Launched as a student-faculty exercise in the early 1950s, the project has developed a broad following. Four times a year, Kimbell unveils his economic scenarios in a campus ballroom before hundreds of members of the public.

“If you’re making a decision to build a plant to generate electricity, you’re at least implicitly forecasting that there’s going to be a need for the electricity,” said Kimbell, who composes music on an electronic keyboard at home when he isn’t tapping the keys of his IBM microcomputer at the Anderson Graduate School of Management.

To make their forecasts, economists sift through a continuous stream of data about business activity and consumer behavior.

With the help of computer models, they then make judgments about tricky relationships: A drop in building permits may foreshadow a decline in home building--and ultimately a downturn in construction. A rise in interest rates may boost the dollar’s value--but hurt U.S. exports.

Hundreds of Relationships

“If we see that employment growth was slowing in the last several months, it could mean that personal income growth will be slowing--and ultimately retail sales as well,” said Adrian R. Sanchez, a regional economist at Security Pacific National Bank.

The science is inexact, its practitioners are the first to concede. Numbers of all kinds are sorted and sifted to reach broad conclusions.

“We take hours and hours during the year to fit historical relationships together,” said Kimbell, who works with another Ph.D. economist, a researcher and students in a program partly financed by attendance fees in the $145 range for the quarterly meetings.

“How does a change in defense spending affect employment in the aircraft industry? How does a change in interest rates affect the housing industry? How sensitive are consumers to the price of gasoline?

“There are over 100 relationships that go into a (computer) model the size of our California model.”

One of the most important relationships is the link between the state and national economies.

The fortunes of California’s vast manufacturing, service and agricultural sectors are intimately tied in with the rest of the nation. And that means forecasters must closely follow national statistics on employment and economic growth.

At the same time, they must keep in mind the distinctive qualities of California’s economy: a vast manufacturing base--tilted toward high tech--robust trade with countries in the Pacific and a diversity of business activity that insulates the state from weakness in any one industry.

“My belief is that California can’t suffer a regional recession a la Texas or the Midwest,” said Fred Cannon, a regional economist at the Bank of America in San Francisco, citing regions that were hobbled by problems in energy and agriculture.

Not that California is immune to ailments that threaten the rest of the country. In a few respects, it may be particularly vulnerable.

How High Will Rates Rise

Some analysts say California’s sizzling real estate market could turn especially chilly in a recession, with painful effects for the construction industry. Also, any sharp cut in federal defense spending would be felt in the state’s large defense and aerospace sectors, with negative ripple effects.

“If we’re projecting a recession nationwide, it’s a pretty good bet we’re expecting a downturn in California,” Sanchez said.

For the short term, forecasters agree, California’s outlook is similar to that of other regions. Inflation is rising to the 5.5% range, most believe, and economic growth will continue at a slow pace or possibly stop altogether, with a chance of recession later this year or in 1990.

A question: How high will interest rates rise--and at what level could they start to drag the national economy downward?

“There’s a lot of concern that if (interest rate) policy is tightened any further, there could be a recession,” Sanchez said.

What’s more, rising rates might cause special trouble for California, because so many residents have taken on adjustable-rate loans for homes and other financing, Bank of America’s Cannon said.

If predicting what will happen next year is difficult, gazing out into the long term--say to the year 2000--is an even more daunting challenge that forces analysts to consider a whole range of unknowns.

The state’s economic growth, for instance, could be influenced by traffic, crime, smog, immigration, the cost of AIDS, even political forces, such as the slow-growth movement.

“A lot of economists would say, ‘I don’t deal with those things--it’s not my specialty.’ But a forecaster cannot avoid them,” declared Kimbell. “You’re trying to help people identify the issues that could impact on them from whatever source, and it’s an untidy, messy, complicated set of issues.”

When faced with such puzzles, economists are notorious for hedging their bets. But they don’t always succeed: Most can remember at least one unsettling instance when their views led them out on a lonely limb.

Sanchez recalls the time he gave an upbeat forecast to a decidedly downbeat crowd. The occasion: a UCLA conference in the jittery weeks after the October, 1987, stock market crash.

“I got the feeling that I was being viewed as a Pollyanna,” he remembered. “Fortunately, things came out much better than even I thought they would.”

Wise as Scott Joplin

But post-crash events didn’t vindicate Kimbell, who--like many others--warned that a sharp downturn was in the offing. Several years earlier, his forecast of recession had proven on target, despite the governor’s distaste for the news.

This time, however, the economy roared back to life after the 1987 financial debacle, propelled by lower interest rates.

Months later, Kimbell responded with a musical mea culpa: At another UCLA conference, he passed out cassette tapes of Scott Joplin piano tunes, including his own performance of the “Wall Street Rag,” commemorating a 1907 financial panic.

Captions printed on the old sheet music seemed eerily prophetic: “Panic in Wall Street, brokers feeling melancholy. Good times coming. Good times have come.”

In the recent interview, Kimbell reflected on his errant prediction with some regret: “I blew it. I wish I’d been as wise as Scott Joplin . . . . I had one of the most accurate records in the nation. I’ll never get it back.”

But there wasn’t much time for looking backward. The economist had a public forecast scheduled a few days later and needed to get ready for a new round of questions on inflation, interest rates--and the next recession.