Economic Growth May Rival 1960s’ : Could Continue Through Decade, Experts Predict

Almost from the start of the economic recovery that began in late 1982, mainstream economists have been predicting that another recession was just over the horizon. But the most likely outlook for the economy today, many analysts now acknowledge, is for an expansion that could rival the 1960s as a period of sustained prosperity.

“The recovery has been underestimated from the beginning,” said Irwin Kellner, chief economist at Manufacturers Hanover Bank. “Left to its own devices, this expansion could keep right on rolling through the end of the decade.”

Why has the thinking changed? Many economists, their attention focused on the unknown dangers of budget and trade deficits, now admit they failed to recognize that the deep recession of 1981 and 1982 wrung so much inflation out of the economy that the expansion would still have a lot of running room even after more than three years of growth.

Unbounded Optimism

The belated recognition that inflation was dealt a serious body blow by the recession, together with the recent dramatic plunge in oil prices, has created a climate of unbounded optimism in financial markets. Interest rates have fallen to levels not seen in more than eight years. The stock market has reached record heights almost every week.

“The booming world stock markets may be gradually incorporating something new--namely, the increased perception that this can be an extremely long expansion,” wrote Alan Reynolds, chief economist at Polyconomics Inc., a New Jersey consulting firm that offers a “supply-side” view of the economy and serves as an informal think tank for conservative presidential contender Rep. Jack Kemp (R-N.Y.).

And at the other end of the economic spectrum, Walter W. Heller, the former chief economic adviser to Presidents John F. Kennedy and Lyndon B. Johnson, expects a robust economy for at least the next couple of years. “This could be a real turnaround year for the economy,” Heller said. “Even though the Administration and Congress have not eliminated the corrosive effects of the deficit, we still see a very brisk expansion ahead.”

Trade Deficit May Ease

Deficit fears have already begun to diminish in importance. Continued economic growth is expected to help narrow the budget gap by boosting tax revenues.

And the declining value of the dollar, which will make foreign goods more expensive to U.S. consumers and American products cheaper abroad, holds out promise of easing the trade deficit.

“We don’t see a recession anytime on the horizon,” said Donald Straszheim, chief economist at Merrill Lynch in New York. This year, he added, “should be regarded as the first year of recovery from 1985’s slowdown, not the fourth year of recovery from the 1981-82 recession.”

The 1985 slowdown, which actually began in the summer of 1984, caught most economists by surprise. The growth rate in the fourth quarter of 1985 fell to an anemic 0.7% and made last year the worst of the recovery so far, with the gross national product gaining just 2.2% after adjustment for inflation.

Some Forecast a Boom

Discouraged by several disappointing economic statistics early this year, few analysts can imagine much improvement in growth until the second half of 1986 at the earliest. But a handful of iconoclastic analysts foresee a strong rebound that will push the economy ahead at a much faster pace.

“Most of my colleagues think I’m crazy to be forecasting a boom,” said David A. Levine, chief economist at Sanford C. Bernstein & Co., who was one of the few analysts to forecast the slowdown. “They think that 3% to 4% growth is the most you should ever expect. But that’s not the way the economy performs--it always grows in fits and starts.”

Levine identifies three kinds of economic periods--booms (sustained growth of at least 4.5%), slowdowns (periods of consistently slower growth) and recessions (sustained declines in economic output). Since the slowdown of 1957, he says, no period has lasted more than a year and a half.

Even during the long expansion of the 1960s, the economy fluctuated between boom and slowdown. And in the 1970s, the economy bounced even more wildly between recession and boom, with some slowdowns in between.

Indeed, what is most surprising about the economy’s recent performance is that it has been so consistent. For six consecutive quarters, the economic growth rate has held between 0.6% and 3.7%. Levine says the economy is due for a boom or a recession--and a recession, he says, is not in the cards.

For the first six years of the decade, growth was far below the long-term trend line of 3% to 3.5%. At the same time, unemployment remains above 7%--the highest level this far into an economic recovery during the post-World War II era and a significant factor in holding down wage demands.

As a result, even if the economy grows over the next two years at the relatively rapid 4% rate predicted by the White House, the average growth of real GNP for 1980-87 would still be less than 2.4% a year.

To some economists, that suggests the economy can continue to move forward for several years without the danger of another upward price spiral. “We’ve had solid news on inflation,” said W. Lee Hoskins, chief economist at Pittsburgh National Bank, “and I don’t expect to see pressures or strains for some time.”

Although inflation may be down for the count, it is almost certainly not knocked out for good. Some analysts with strong forecasting records warn that oil-induced price declines will prove only temporary and that prices will begin creeping up again as the economy gains renewed strength.

As long as any revival of inflation remains modest, however, it is not likely to kill the recovery for several years. The Federal Reserve Board, which triggered the two recessions of the 1980s by fighting inflation with a policy of tight money and high interest rates, appears to see less need now to restrain prices than to stimulate the economy.

If the economy turns strongly upward, the steadily declining interest rates now widely expected by financial markets are unlikely to materialize. “There is an invariable pattern during booms,” Levine said. “The Fed tightens and long-term interest rates respond by rising.”

Nonetheless, even if interest rates rise as the Fed attempts to cool off the economy, the central bank is all but certain to avoid clamping down hard enough to throw the country into an early recession.

Potential Obstacles

“It seems fair to conclude that inflation may not come back too quickly,” said Gary Stern, president of the Minneapolis Federal Reserve Bank and a member of the Fed’s policy-making committee. “But we will be looking at the price indices closely in the future. If there’s one thing we’ve learned, it’s that you don’t want inflation to gain some momentum, because it then becomes that much harder to stop.”

Several other potential obstacles could still cause the economic expansion to stumble. Some economists, for instance, remain worried that Congress will not make much of a dent in the $200-billion-a-year federal deficit despite the new Gramm-Rudman law, which requires automatic spending cuts if Congress does not otherwise trim the deficit to zero by 1991.

“The domestic economy looks pretty good right now, but the downside risks are big,” said Alan Greenspan, who was chief economic adviser to former President Gerald R. Ford. Recent declines in interest rates reflect the widely held assumption that Congress will bring down the deficit, he said, but if Congress fails, “long-term interest rates would rise by a point or more and undercut the improving growth path.”

Long-Range Problem

Others, however, are convinced by recent events that the accumulating burden of budget and trade debt poses more of a long-range problem than an impending crisis. “The world economy has adjusted much more than we expected to the large deficits,” conceded Barry Bosworth, a senior economist at the Brookings Institution. “The interest on government debt and foreign debt may become a horrendous burden in the future, but there is almost no near-term cost.”

A Whimper, Not a Bang

Some economists also believe that consumers have dug so deeply into their own savings and are now so overburdened with their own debts that their spending has to falter soon.

“It’s only a question of time before the consumer throws in the towel,” said A. Gary Shilling, who runs his own economic consulting firm in New York. “Maybe we will muddle through, but I see this recovery expiring with a whimper rather than a bang.”

There is little evidence so far that consumer spending, which constitutes nearly two-thirds of all economic activity, is about to slump. “Most consumers are still very confident about the future,” said Fabian Linden, an economist at the nonprofit Conference Board in charge of consumer research. “And with what has been happening recently to interest rates and oil prices, they have good reason to remain that way.”

Instead, what seems to be driving the economy forward now is the need for firms to rebuild their depressed inventories to keep pace with still-rising consumer spending. After months of liquidating their stocks of unsold goods, businesses appear to have reversed the pattern in January, and inventories jumped by 0.6%. Inventory rebuilding, together with a leveling off of growth in the trade deficit, could give a strong upward jolt to the economy early this year.

Dreaded Budget Deficit

The effect on the dreaded budget deficit would also be positive. Even without additional spending cuts or higher taxes, the high-growth scenario of the Congressional Budget Office--based on 4% growth this year and 4.3% in 1987--would shrink the deficit to $154 billion next year, just $10 billion more than the target set by the Gramm-Rudman budget-balancing law.

“When it comes to economic forecasting, there can be no guarantees,” Kellner said. “But the problems look manageable and the outlook is currently about as favorable as it can be. So relax and enjoy it.”