Borrow-and-Buy Binge Could Catch Up With U.S. Next Year : Economic Growth Likely for 1986
Three times since World War II, Republican presidents have won landslide reelection victories. And, every time, the economy was sliding into a recession a year after the incumbent’s triumph--every time until now.
In 1958, under Dwight D. Eisenhower, and in 1974, as Richard M. Nixon was entering the second year of his second term, economic downturns were under way. And the recessions contributed to the “six-year itch” among voters that cost Republicans dearly in off-year elections in those years. But, in 1986, President Reagan and his fellow Republicans--whatever their other problems--should not have to worry about the overall state of the economy.
Poised for Another Surge
As Reagan proudly pointed out in his State of the Union message, the U.S. economy appears to be poised for another surge in output.
“Tonight, the American people deserve our thanks for 37 straight months of economic growth, for sunrise firms and modernized industries creating 9 million new jobs in three years,” Reagan declared. “The United States is the economic miracle, the model to which the world once again turns.”
In fact, economic growth for the last year and a half has been weaker than the Administration had predicted, but now the economy is apparently escaping from the doldrums.
In contrast with widespread fears last summer that a downturn was looming, economic analysts are now nearly unanimously convinced that no recession lies in wait before the election this November. And some of the most prescient forecasters see solid evidence that their unorthodox predictions of a strong economic rebound in 1986 are beginning to prove out.
“This recovery has been underestimated time and time again,” said Irwin Kellner, chief economist at Manufacturers Hanover Bank in New York. “Not only is there no recession in sight, but things are looking very bright for 1986. The recent drop in oil prices should only add further strength to the resurgence of economic growth.”
If the immediate outlook is favorable, however, the underlying problems of the economy remain troubling. And what hit Eisenhower and Nixon in their sixth years, many economists believe, could be lying in wait for Reagan in his seventh year--1987.
Slumps Amid Prosperity
This year, even as some regions of the country are enjoying renewed prosperity, others remain mired in a slump.
“If you look at the farm economy, textiles, mining, energy and timber, there are probably some 20 states that never really recovered from the recession (of 1981-82),” said Kevin Phillips, a noted conservative political analyst. “The Administration may have avoided the traditional Republican downturn for now, but, with some key sectors of the economy flirting with real deflation, the situation may be even more worrisome.”
Moreover, many economists contend that, after four years in which unprecedented budget and trade deficits were largely offset by influxes of foreign capital, the United States is living not only on borrowed money but on borrowed time. It is eroding its future prosperity for the sake of today’s carefree buying spree, those economists fear.
“We have been on a consumer binge,” argues Walter W. Heller, former chief economic adviser to Presidents John F. Kennedy and Lyndon B. Johnson, “financed by the liquidation of our assets abroad, by skyrocketing imports and by the lowest rate of national savings and investment since the 1930s.”
Binge Still Alive
For good or ill, the binge still seems to have a lot of life left in it.
Consumers, despite mounting debts, continue to spend at a rate far above most analysts’ expectations. Allen Sinai, the relatively cautious chief economist of Shearson Lehman Bros. in New York, now concedes that the consumer is “alive, well, kicking, spending, and not saving.”
Business, after paring its inventories to the bone last year, appears to be starting to restock warehouses and retail shelves to keep up with this demand. And home building, long depressed by high borrowing costs, finally began to revive late last year after interest rates fell.
Moreover, the tide of imports that rose to fearsome heights last year and took billions of dollars in orders away from U.S. producers may now be cresting because the value of the U.S. dollar--almost unnoticed--has plunged about 25% since last March.
As a result of those forces, the groundwork has been laid for strong economic growth, which normally would last about a year.
“What most economists don’t seem to remember is that the economy always grows in fits and starts,” said David Levine, chief economist at Sanford C. Bernstein & Co., a Wall Street investment firm. “A boom would not be unusual at this stage of the recovery; it is practically inevitable.”
Budget Showdown
Yet, even with a robust economy likely this year, the White House and Congress remain headed for a showdown this fall over how to meet the deficit requirements of the Gramm-Rudman balanced budget law that could drastically reshape the economic landscape in 1987.
The longer-term economic dilemma confronting lawmakers is bleak: The government cannot afford to cut the deficit, many economists argue, but it cannot afford not to, either.
With the deficit currently providing more than a $200-billion stimulus, slashing it to Gramm-Rudman’s $144-billion target for fiscal 1987, which begins on Oct. 1, could substantially weaken the economy next year.
But, avoiding serious belt-tightening measures could be just as deadly, because the Federal Reserve might be forced to react to financial market disappointments over another failure to control the deficit by allowing interest rates to rise. That would threaten the recovery next year.
“The problems facing the economy are largely political in nature,” Manufacturers Hanover Bank’s Kellner said. “We’ve delayed the moment of reckoning on the deficit, but Gramm-Rudman suggests Congress and the Administration may not be able to avoid it much longer. One way or another, that could mean a lot of fiscal restraint hitting the economy really hard in 1987.”
