Forecast of Growth in GNP Revised Downward

The White House, officially acknowledging reports of a downward revision in its economic forecast, Monday projected a growth rate of 3% for 1985 instead of the 3.9% forecast that it had issued as recently as April.

Because economic growth during the first half of the year was an anemic 1%, the forecast depends on achieving an annual growth rate of 5% for the second half of the year, a much stronger rebound than many economists think is possible.

Still, Beryl W. Sprinkel, chairman of President Reagan’s Council of Economic Advisers, defended the projection as realistic. He argued that a pickup in business inventories and rapid growth in the money supply from earlier this year will strongly jolt the economy for the rest of 1985.

Sprinkel, briefing reporters after the figures were released, refused to predict how the economy’s recent slow growth would affect future budget deficits. But other Administration officials have acknowledged that the slower growth rate would add about $15 billion to the deficit in fiscal 1986, which begins Oct. 1.

For this year, the economic slowdown is not likely to significantly affect the budget deficit, primarily because interest rates also have been lower than expected and actual spending has fallen short of earlier projections.

The Administration currently is projecting red ink of about $203 billion for this year’s budget and assumes that Congress eventually will approve at least $50 billion in spending cuts, aimed at cutting the deficit to $180 billion next year.

Revised projections for the budget, which normally would be included in the new economic forecast, will be delayed until sometime in August.

Sprinkel moved earlier this year from the Treasury Department to become Reagan’s chief economic adviser after Martin A. Feldstein resigned to return to Harvard University.

In contrast to his often controversial predecessor, Sprinkel deliberately refused to answer nearly all questions on economic policy. Sprinkel, a monetarist who emphasizes the overwhelming importance of changes in the money supply in accounting for inflation and other economic fluctuations, even avoided explaining what kind of monetary policy he believes the Federal Reserve should be following.

But Sprinkel acknowledged that a strong rebound in the economy is likely to push interest rates higher.

“I would be a little surprised for interest rates to continue declining in an environment of sharp acceleration of economic activity,” he said. “They usually cease going down and turn up a little bit.”

Nonetheless, Sprinkel said short-term interest rates for 90-day Treasury bills, after leveling off next year at an average of 7.5%, should start falling again in 1987, dropping as low as 5% by 1990.

Most other Administration economic projections remained unchanged, with the White House still expecting growth to average about 4% a year for the next four years and inflation to remain under control, rising slightly from the current 3.7% to 4.3% next year before declining to 3.2% by the end of the decade.

Under the White House economic assumptions, unemployment is expected to remain close to its current 7.2% level for the rest of the year but then decline to 5.8% by 1990.

Sprinkel defended the Administration’s refusal to consider tax increases as part of an effort to close the budget gap, but he admitted that the strategy has not yet produced successful results.

“Our objective is to slow the rate of growth in government spending such that, at some point out there, we get rid of the deficit,” Sprinkel said. “I must confess we haven’t been gloriously successful, but that doesn’t mean we aren’t going to continue trying.”