Because of his dim view on growth, Paulsen was also the most accurate on inflation, unemployment, and monetary policy. (In ranking the forecasts, BusinessWeek scored the results only up to the third quarter, so the attacks on September 11 had little effect on the results.)
Paulsen based his outlook on the events following the Asian crisis of 1997. "That crisis was a phenomenal warning shot across the bows of the industrial nations," he says. "It exposed the disinflationary world we live in," characterized by excess supply and sluggish demand. In his view, this new era, which prevails today, forced companies to pursue cost-cutting to avoid a profit meltdown. Companies focused on tech investment as the best way to lift productivity and lower costs. This capital spending boom fueled economic growth in the late 1990s.
In late 2000, though, "it was hard to see what was going to drive growth [in 2001], and no policy stimulus was in place back then," Paulsen says. Manufacturing was already hurting, and short-term interest rates were higher than long-term ones. He expected the Federal Reserve to cut interest rates and the new Administration to put in place a modest stimulus package. But he didn't think the moves would come soon enough to stop a rise in the jobless rate.
Looking at 2002, the 43-year-old Paulsen is again downbeat. "We'll recover, but it won't be what people expect," he says. "We'll be in the 2% mode." He rules out 3% to 4% growth because there's not enough pent-up demand to fuel spending by consumers, and businesses still have an overhang of capital equipment. Paulsen says he wouldn't be surprised if the Fed lowers the fed funds rates in late 2002 to close to 1% to pump up growth in 2003.
Paulsen grew up in Iowa and built his career at various Midwestern firms. He notes that "not coming up through the Wall Street ranks gives you a different perspective." That outlook helped Paulsen outscore his fellow economists in 2001. Should he prove the most accurate again in 2002, the U.S. faces another painful year. By Kathleen Madigan in New York