The U.S. Economy in 1990 and 1991: Continued Expansion Likely

This publication primarily presents economic research aimed at improving policymaking by the Federal Reserve System and other governmental authorities. Articles may be reprinted if the source is credited and the Research Department is provided with copies of reprints. The views expressed herein are those of the authors and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System. As the seventh year of economic expansion draws to a close, inflation fears seem to have subsided. But in recent months some signs of rising inflation and slowing growth have emerged. These signs have caused many economists to predict that inflation will be higher and real growth slower in 1990 than they were in 1989. In contrast, a model used by researchers at the Federal Reserve Bank of Minneapolis suggests that those forecasters' predictions are too pessimistic. The model predicts that strong consumption growth will sustain the expansion in both 1990 and 1991 and that inflation will remain under control. Still Walking a Fine Line? In a Quarterly Review article published early in 1989, Preston Miller and I argued that the economy had to walk a fine line between recession and accelerating inflation (Miller and Runkle 1989). We suggested that real output in 19 89 could not grow much faster than 3.1 percent without an increase in inflation. At the time, the Minneapolis Fed's Bayesian vector autoregression (BVAR) model of the U.S. economy predicted moderate real growth and moderate inflation for 1989. The model's predictions were largely correct: It now looks as if real gross national product (GNP, adjusted for inflation) will grow by about 2.4 percent and inflation, as measured by the GNP deflator, will be 3.9 percent. These numbers seem to indicate that the economy has managed to walk a fine line in 1989. Since the middle of 1989, however, there have been some signs that the economy may be weakening. Employment in manufacturing has declined steadily during the last half of 1989. Between the beginning of June and the end of December, nearly 200,000 manufacturing jobs are likely to be lost. New sales of domestically produced autos in October and November fell to an annual rate of 6 million units—their lowest level in six years for any two consecutive months. As a result of these signs, many economists are predicting a decline in real consumer spending during the fourth quarter of 1989. There has …