Viewpoints : The Economic Outlook for 1990

What’s in store for the economy in the coming year? Will we fall into a recession? Will the trade and budget deficits shrink? Will interest rates fall?

For opinions on these and other economic issues, free-lance writer Sharon Bernstein interviewed six members of The Times Board of Economists. Following are their views.

Irwin L. Kellner, chief economist at Manufacturers Hanover in New York.

The economy right now is most likely declining. It’s entering the new year and the new decade on a down note, with a decline that is likely to continue through the first quarter of 1990.


There may be some growth later in the year, but it will be minor at best, with little or no movement in the second quarter, and fractional growth in the third. The economy is likely to stagnate at least through September.

Key factors will be high interest rates and the availability of the dollar, which will likely combine and lead to a decline in goods production and a continued softening of the housing market. The slow market for automobiles is also pulling the economy down.

At best, it will be a period of stagnation, and at worst, it could resemble something akin to an old-fashioned recession.

Paul R. Krugman, professor of economics at Massachusetts Institute of Technology.

The new year will bring bad news for the U.S. trade deficit. The combination of declining U.S. competitiveness and the growing burden of payments to foreign investors is going to start tipping the balance away from us again.

It’s going to mean a couple of things. It’s going to cause some drag on the domestic economy, which will probably mean lower interest rates, although perhaps not a recession. And it will likely set us up for another sharp fall in the dollar.

We’re going to have more foreign purchases in the United States, a larger trade deficit and a lot of demands both for protections against imports and restrictions on foreign investment.

Allan H. Meltzer, J. M. Olin Professor of Political Economy and Public Policy at Carnegie Mellon University and a visiting scholar at the American Enterprise Institute.


The 1990 economy will get off to a slow start, continuing the sluggish performance of the fourth quarter of this year. A major factor contributing to the slower economy is the slow money growth experienced in 1988 and early 1989.

Will there be a recession? It’s possible, but we may avoid it. The key to next year is a continuation of relatively steady, but positive, growth of money. The Federal Reserve has to let the economy recover while continuing to push the inflation rate down.

If the Fed cooperates, we will have economic recovery in the second half of the year with a modest decline in inflation, probably reaching 3% by the end of 1990.

A big risk to the forecast comes from the Congress. Mandatory benefits or shifting health costs to business will make U.S. industry less competitive, reducing domestic output and exports.


A. Gary Shilling, a New York-based economic consultant.

We think a recession will be the key feature of 1990. It will probably be worldwide and it could be deep. It’s really already started. I think we entered it in the fourth quarter of 1989.

All told, the decline will probably be on the order of the 1973-75 recession, which saw real gross national product go down 4.3%.

The biggest causes are the myriad under-collateralized loans confronting debtors as diverse as Third World nations, corporations purchased through leveraged buyouts, troubled lending institutions and overextended consumers.


Long term, how bad could it get? The acid test will come in the form of the recession itself. That’s when we could have the Third World debtors not able to service their debt, the leveraged buyout companies without enough money to service theirs and consumers who are laid off not able to pay their bills.

Murray Weidenbaum, director of the Center for the Study of American Business at Washington University in St. Louis.

One of the things I’m focusing on are defense cuts.

I think the impact of the cuts will be much more modest than most people anticipate, because the percentage of the overall defense budget that will be cut is actually very small. In fact, there will be no reduction of actual spending levels--it’s just that the budget won’t grow as fast as previously anticipated.


Perhaps defense will move from 6% of GNP to 5%, but this economy has handled much worse.

I do see a slowing in the economy next year, but defense, while a source of weakness, will not be a major cause. There’s no one sector that’s pacing the economy in 1990. It’s just running out of steam after eight years of expansion. It’s showing all the signs of old age.

David M. Gordon, professor of economics at the New School for Social Research in New York.

I am not inclined to make short-term forecasts, partly because I don’t believe I have any special ability to make better forecasts than anyone else, and partly because I am more concerned about longer-term developments and restructuring.


If a recession comes, I do think it will be sharp and jolting. But that’s largely because of structural changes in the economy, not short-term economic interactions. We have been purchasing expansion at the price of future economic disarray. We have been enjoying what some of us have called unsustainable growth. We’ve borrowed from the future to finance the present. We’ve been running down the environment, moving closer and closer to the physical limits of growth. And we’re running down our human resources as well, tolerating more and more unskilled potential contributors to economic well-being.

We should concentrate on the sources and possible alternatives to this kind of unsustainable growth over the longer term. The precise increments in the expected rate of growth of real gross national product over the next 12 months seem much less important.