Drift or Upturn? Experts Split on Economy
Will the economy bounce back?
Most analysts, particularly those still recovering from the shock of Thursday’s report that the economy grew at an anemic 1.3% annual rate during the first three months of this year, find ominous evidence that the economy will simply drift along aimlessly--or, even worse, fall into a recession.
“The economy is fading,” said Allen Sinai, chief economist at Shearson Lehman Bros. Inc. in New York, reflecting the latest consensus among the vast majority of economists. “We’re on a fundamentally slower growth path. High interest rates, the trade deficit and an unbalanced (government) fiscal and monetary policy mix are finally taking their toll.”
Some Dismiss Gloom
But an unusual assortment of iconoclastic economists is forecasting a resumption of strong growth this year. These economists--ranging from conservative “monetarists” to liberal “Keynesians” who are united only by their success in predicting the recent poor performance of the economy--generally dismiss the gloomy new conventional economic wisdom, hinting that many of their colleagues are simply swaying with the latest wind.
“Too many economists never really look at the underlying factors and just extrapolate from the latest numbers,” said Michael Bazdarich, an economist at Claremont Economics Institute in Claremont, Calif. “It’s amazing to me that we are seeing nothing but green lights out there, and everybody is so pessimistic.”
The predictions for the expected revival of the economy vary, with some analysts forecasting more vigorous growth this spring and others saying that it may be delayed until summer. The common thread, however, is a willingness to go out on a limb for their beliefs rather than clinging tenaciously to the frequently erroneous consensus forecasts.
For David Levine, chief economist at the New York investment firm of Sanford C. Bernstein & Co., the most likely course for the economy can be found in a close reading of economic history.
Boom and Sluggishness
Every sustained expansion of the economy since World War II, Levine points out, has gone through alternating periods of boom and sluggish growth. Once a slowdown begins, it almost invariably lasts for about six months to a year, and there is little reason to believe that the weak growth that began in the third quarter of 1984 is part of a different pattern.
There is a slight danger that the economy has already fallen into a brief recession, Levine believes, but he says economic output is all but certain to begin accelerating sharply this summer.
“With the dollar beginning to fall, the trade deficit should no longer be a drag on the economy,” Levine said. “Once we get that bleeding stopped and we receive a booster shot from (a buildup of business) inventories, the economy should be off to the races again.”
Although consumer spending has grown steadily, the high value of the dollar has contributed to a flood of inexpensive imported goods, diverting much of the economic gains to foreign producers. A retreat of the dollar, though, should ease that pain and open the way for new U.S. exports to foreign countries that have revived their economies by taking advantage of the growing U.S. market.
Downturn Discounted
Even without a substantial improvement in the trade deficit, there is little reason to think that the U.S. economy is on the verge of a major downturn.
“People often make the mistake of thinking the economy will simply run out of gas all by itself,” said Irwin L. Kellner, chief economist at Manufacturers Hanover Bank in New York. “But, in fact, it invariably takes a major shock to bring the economy to a halt and, as long as the Federal Reserve doesn’t get too worried about the growing money supply, I don’t think we’re going to get such a shock soon.”
In implicitly criticizing the monetarist conviction that fast growth in the money supply must inevitably lead to a reacceleration of inflation, Kellner added: “I’m convinced that, faced with a choice between monetarism and realism, the Fed will choose realism.”
Yet Bazdarich, who agrees with Kellner about a coming rebound of the economy, relies on monetarist arguments to explain why he believes that the economy will pick up steam again.
13% Money Growth
“The Fed has been allowing the money supply to grow at a 13% rate for the past eight months,” he said. “We’ve never seen a recession in the wake of money growth figures like that.”
What most worries some economists is that the recent spate of bleak economic reports will feed on itself.
“The economy is not fundamentally weak, and we’ve got plenty of room to grow,” said Robert Gough, an analyst at Data Resources Inc. in Lexington, Mass., a leading forecasting firm. “But I’m worried that consumers might retrench because they fear that more bad news is ahead. If Americans lose their sense of being upbeat, we all could be in trouble.”
