Painful Slump Is Foreseen by Few Economists

Once again, as worried investors see it, the U.S. economy is teetering on the cliff’s edge, while the next recession waits perilously below.

But despite a streak of negative economic news that sent the stock market tumbling last week, many analysts say the fears are overblown. The economy has lost much of the pizazz it showed in 1988, and signs of a slowdown are mounting, most agree. But only a minority forecast that a painful slump is imminent.

“We’re certainly not looking at measures which indicate the economy is falling into an abyss,” said Robert H. Chandross, chief North American economist at Lloyds Bank in New York.

Cockpit Jargon

To describe the economy’s choppy course, analysts lately have been using terms that might be more expected in airplane cockpits than corporate conference rooms. Here are their most likely scenarios:

--The soft landing. Under this outlook--the most widely held--economic growth will be sluggish as inflation and interest rates fall. Engineers for such a landing would be members of the Federal Reserve Board, who pushed interest rates up earlier in the year. That was because high employment and bustling factories suggested inflation might become more serious, and they sought to cool off economic activity.

“Pieces are still in place for the soft landing to be realized,” declared Norman E. Mains, chief economist at the Bateman Eichler, Hill Richards investment firm in Los Angeles.

--The hard landing. This is the view--which gripped the stock market last week--that a recession could begin shortly. It is based on the theory that the higher interest rates, which have started to recede, choked off growth for the near future. It is backed up by various signs of lackluster economic activity. “We think a recession is at hand,” said Donald H. Straszheim, chief economist at the Merrill Lynch investment firm.

--The delayed hard landing. In this alternate scenario, the economy displays latent strength in the coming months, inflation rises--and the Fed responds with another hike in interest rates. “The booming economy would likely lead to a recession in 1990,” warn economists at the WEFA Group, a consulting firm in Bala Cynwyd, Pa.

--No landing (or stagflation). Such a condition, experienced in the late 1970s, would mean stubborn inflation with economic growth that is tepid at best. “I think we’re there for the next year,” said David Hale, chief economist at Kemper Financial Services in Chicago.

While the outlooks vary wildly, analysts agree on this: Economic growth has wound down in recent months, perhaps to a rate of under 2%, compared to rates of about 4% in past years.

Cooling-Off Period

A whole range of signals, including consumer spending, housing construction and manufacturing employment, point to the cooling-off process. Late last week, the Commerce Department reported that May factory orders--for big-ticket items sold by makers of oil refineries, computers, airplanes and other products--fell 2.5%, the steepest slide in 10 months.

A few days earlier, it said that in May the index of leading economic indicators--a broad gauge of economic health--took its worst fall since right after the 1987 stock market crash. Employment growth has been slowing, along with factory operating rates and other signals of business strength.

But believers in a soft landing--sluggish growth--argue that the conditions for a serious slump aren’t apparent. At least a little vitality remains in spending by consumers and companies, they say, both of which may benefit from an easing of interest rates that began in recent weeks.

“There’s widespread evidence of a much slower economic growth rate,” said Norman Robertson, chief economist at Mellon Bank in Pittsburgh, Pa. “But we really haven’t seen the rapid rise in inflation, the speculative boom-like environment that in the past has been the harbinger of a recession.”

Clearly, a debate remains as to the economy’s greatest threat--inflation or recession. Inflation ran at a 6.7% annual rate for the first five months of this year, although most analysts peg the basic pace closer to 5%.

A new piece of evidence in the debate will become available today when the Labor Department releases its June employment figures. Along with other statistics, job creation has tailed off lately, with an average of just 161,000 new, non-farm jobs created in the March-May period, compared to 296,000 new jobs created in the previous three months. In the past, investors have viewed larger numbers of new jobs as signs that the economy was overheating and threatening more inflation.

“If the employment numbers are weak, I’ll have to re-evaluate all this,” said Michael Penzer, a senior economist with the Bank of America in San Francisco and an adherent of the soft landing theory.

For now, however, Penzer believes the economy is strong enough to elude a jarring downturn while weak enough to avoid a major climb in inflation. Such a course seems to be the goal of the Federal Reserve Board, which in June began easing short-term interest rates, a development likely to aid growth. Since the beginning of June, the federal funds rate--the rate banks charge each other on overnight loans--has fallen to about 9 1/2% from the 9 7/8% it had clung to since February.

Recession skeptics are quick to point out that Americans may respond to lower borrowing charges with an increase in buying homes, cars and other major items. Consumer spending represents about two-thirds of U.S. economic activity.

“With the mortgage interest rates backing off as they have been for six weeks or so, it’s much more affordable for many families to be back in the housing market,” said Glenn Crellin, an economist with the National Assn. of Realtors.

Indeed, some argue that changes in the national and global economies now make it unlikely that the whole United States will suffer a recession at the same time.

“You tend to have a recession in Texas and a boom in Seattle,” said John Rutledge, chairman of the Claremont Economics Institute, a private economics consulting firm. “We haven’t had a recession for the whole country in seven years.” The outlook is not unanimous, however. Some analysts take a darker view of the recent data and conclude that a national downturn is about to begin.

“We’ve gotten a host of statistics in the last few weeks that are uniformly weak,” said Merrill Lynch’s Straszheim, who forecasts a mild recession this year. “People’s concerns about the economy are changing from inflation to recession.”

There are other economic concerns besides the recent statistics. Through 1988, for example, much of the U.S. economy’s growth was propelled by rising exports, fueled by a weaker dollar that gave American manufacturers price advantages over their foreign competitors. The dollar has rallied in recent months, however, raising new questions about whether American manufacturers will be able to hold onto their newly gained competitiveness.

The various concerns have been evident in the stock market, which before last week tended to greet signs of economic weakness as news of lower inflation. But last week, the psychology shifted drastically as investors began to worry about a full-blown recession. The Dow Jones industrial average lost more than 91 points.

Some experts counsel that such swings in investor psychology are silly, because individual statistics are often misleading and the U.S. economy is so large and complex.

“It’s kind of like watching the Fourth of July fireworks,” said Rutledge. “You ‘ooh and ah’ when they come out, but the numbers are calculated in the basement of the Commerce Department, and they’re two steps removed from the real world.”

Economy Roars Back

If the current economic jitters prove exaggerated, it will not be the first bout of investor anxiety during the current expansion that proves unwarranted. Many expected a recession after the October, 1987, stock market crash, but the economy roared back to life in early 1988, propelled by lower interest rates.

Despite widespread fears that consumers would cut back on their spending plans after the crash, it didn’t happen. The recent signs are that consumers continue to feel optimistic about their economic future. A June survey of 5,000 households by the Conference Board, a business research organization, found that consumer optimism has stayed at a robust level since last year.

“As long as the consumer remains in good spirits, there is faint likelihood that the economy will take a bad turn,” said Fabian Linden, executive director of the board’s Consumer Research Center.