CEOs Forecast a Slowdown but No Recession

The U.S. economy will slow down gradually over the next year but will avoid a recession before faster growth resumes in the closing months of 1990, corporate forecasters said Friday.

Despite the slowdown, the yearly rate of inflation for consumer goods will remain about 5% and short-term interest rates will rise even further before starting to drop this fall, members of the Business Council were told.

Roger B. Smith, board chairman of General Motors who is chairman of the group of chief executives of the nation’s largest corporations, said the forecast implies a rise in unemployment, sluggish gains in personal income and a mediocre outlook for profits.

The future will be even darker if the Federal Reserve Board continues to tighten monetary policy and raise interest rates to check inflation, Smith told reporters at a news conference. A White House economic specialist, however, said the Bush Administration is more optimistic about the economy than the technical consultants to the corporate giants.

“We think the slight softening we saw in the first quarter was a pause that will be the base for further expansion,” Richard C. Breeden, assistant to the President for issues analysis, said after addressing a closed-door meeting of the group. “It takes pressure off monetary policy and eases concern that the economy was overheating.”

Alan Greenspan, chairman of the Federal Reserve Board, is scheduled to speak to the council today. A meeting of the policy-making Federal Reserve Open Market Committee is set for Tuesday in Washington.

Business leaders said additional tightening by the Fed, with its adverse effect on housing and business investment, could trigger a recession and halt the record eight-year economic expansion.

Most Predict Growth

Only two of the 19 consultants who drafted the forecast, however, predicted a downturn and a solid majority said they believe that the economy will grow for an unprecedented ninth consecutive year in 1990.

Jack Welch, chairman of General Electric Co. said he is more optimistic about the outlook, predicting growth of 2% to 3% in the next year, compared to the 1.5% expansion in the consensus forecast. But Welch said defense contractors will be affected by a leveling off or actual decline in Pentagon spending in the years ahead.

Construction also will have a poor year, said S.D. Bechtel Jr., chairman of Bechtel Group, with an 8% decline in nonresidential construction and a 5% drop in housing this year. Rising costs of borrowing money, he said, have dimmed prospects for builders in 1989.

While there was no sharp criticism Friday of President Bush at the council’s semiannual meeting at this Allegheny Mountains resort, business executives voiced disappointment about the outcome of budget negotiations between the White House and Congress.

“We were disappointed that a more serious bite of the apple wasn’t taken,” said Edmund T. Pratt Jr., chairman of Pfizer Inc., referring to the amount of deficit reduction in the compromise package.

While the Administration and Congress forecast red-ink spending of $99.7 billion in the fiscal year starting next October, the Business Council’s experts said the deficit would be in the $135-billion range.

Sectors Doing Well

Despite the anticipated slowdown, several industry spokesmen said their sectors are doing as well or better than expected this year.

“We’ve had better sales than anticipated across all merchandise lines,” reported Philip M. Hawley, chairman of Carter Hawley Hale Stores, speaking on behalf of the retail industry. “Apparel has been particularly strong.”

“The auto industry’s having a very good year,” said GM’s Smith, predicting the sale of 15 million cars and trucks this year with the aid of interest subsidies and other incentives offered by car makers.

Howard P. Allen, chairman of Southern California Edison, said he does not foresee any slowdown in his region, where his utility has been adding 90,000 to 100,000 new customers each year.