THE PERILS OF UNDERESTIMATION

WHETHER they are making automobiles, alligator bags or applesauce, modern businessmen rely heavily on economic forecasts to tell them what the state of the nation is going to be in coming months or years and how much of a market their product can expect. With more and more statistics available and better tools to do the work, economists who make such estimates should be getting better at their science. Surprisingly, however, many U.S. planners in industry as well as Government are guilty of underestimating the basic strength of the economy and the demands that it makes on the future. To say the least, such underestimation can be responsible for some very unfortunate results.

"My classic example of underestimation," says Martin Gainsbrugh, chief economist for the National Industrial Conference Board, "is the Trillion-Dollar Economy." In terms of gross national product, the U.S. was not expected to reach this thousand-billion-dollar mark until about 1975. It now appears that the figure will be achieved either in 1970 or 1971. And a tremendous number of business and economic decisions rest upon accurate estimates of the G.N.P.

Both business and Government rely more and more on computers to predict future needs. It is therefore ironic that the computer industry itself vastly underestimated the demands for its products (44,400 computers are at work today, v. a 1954 estimate that 50 would be). Computer makers are now a chronic 25% behind partly because they cannot stock an inventory, partly because they have underestimated the demand for their own product. There are classic examples of underestimation in many other important areas:

P:Wall Street has already exceeded the 10 million-share days that only four years ago were forecast for 1975, is plagued by late tapes, overburdened facilities and overworked staffs. To catch up with the paperwork, stock exchanges now close one day a week, a condition that will probably continue at least through July.

P:The airline industry has already reached a peak--86 billion annual passenger miles--that was not anticipated until at least 1971. The result is that the Federal Aviation Administration is giving serious thought to closing down smaller airport control towers, shifting traffic controllers, and even limiting the flood of new aircraft deliveries until the Federal Government and the industry together can make some sense out of overcrowded skies and overburdened airport facilities.

P:Color-television manufacturers so underestimated their market--figuring that it would build as slowly as black and white television did--that they were unable to keep up with sales. Now one bottleneck has been solved with increased production of picture tubes and another by stepping up the output of cabinets. But if anything goes wrong with the set, the owner will soon discover that there is a drastic shortage of people who can fix it.

To lesser degrees, other aspects of the economy have long been equally underestimated. Industry misread the demand for electronic equipment, xerography, synthetics and plastics. Government underestimated not so much the demand but the need for improved expressways, bridges, air-pollution controls, airport facilities, and the roads and devices that will make congested city traffic move more rapidly. Recreational facilities are in short supply because everyone underestimated the combined impact of increased leisure time and higher disposable income; to tee off for a game of golf on weekends has become a long and frustrating process, as many golfers can attest.

There is a sort of psychology working in favor of such underestimations. Explains Conrad Jamieson, the vice president and chief economist of Los Angeles' Security First National Bank: "If you underpredict, you can always say, 'Gee, we did even better than I had predicted,' and it's not so bad. But then if you say, 'Well, we didn't do as well as I thought we would,' you look a lot worse."

Estimating population trends is one of the most critical points for both Government and business, since this involves broad questions of social needs and consumer demand. Even at the height of the population explosion, the U.S. population rate was one thing that forecasters were able to project pretty well. Now, with the advent of the pill, economists may find it more difficult to plot future family formations accurately until a new pattern is established. And it is perfectly possible that pill makers may yet underestimate demand for their product.

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