Some Analysts Detect Slowdown in U.S. Economy

In a development that may spark disbelief among many Americans, a new batch of statistics suggests that the nation’s economy, buffeted by the Asian financial debacle and other factors, may have shrunk between April and June for the first time since 1991.

Although most analysts find it unlikely that the United States is entering a full-fledged recession, some pessimists contend that the economy could remain weak for months.

Federal Reserve Board Chairman Alan Greenspan, testifying before Congress on Tuesday, sidestepped speculation about a possible decline and pointed out that despite some adverse trade and inventory figures, other sectors of the economy are still performing very well.

He warned that even if the economy slows somewhat, there is still enough momentum to pose “significant” risks that inflation may rear up again. And he vowed that the Fed would remain “vigilant,” ready to raise interest rates if wage pressures intensify.

But other economists are not so sure that the possibility of a downturn is that remote.

“The U.S. economy does not look or feel like it is in a recession,” said Allen Sinai of Primark Decision Economics Inc., but “very often, recessions have come about surprisingly.”

The sudden slowing stems from three factors: The Asian slump has crimped U.S. exports, weakening America’s manufacturing sector. U.S. businesses have stockpiled too much inventories and are slashing new orders. And the impact of the General Motors strike is widening.

Since the surge in inventory-building was a major element in propelling the economy at a frenetic 5.4% annual rate during the first quarter, many economists are predicting that the recent decline in inventories--which fell 0.1% in May--may have brought the economy to a halt.

The latest figures on the fast-worsening U.S. trade deficit--which showed that U.S. exportorders from Asian markets have plummeted by 24% from their levels of a year ago--are considered likely to have pared the economy’s growth even more.

Stan Shipley, economist at Merrill Lynch & Co., says the government’s scheduled July 31 estimate of the gross domestic product--the value of all the goods and services that America produces--could show that the economy did not grow at all during the April-to-June quarter.

Some analysts are even predicting that the economy will turn out to have contracted slightly.

While a single three-month decline still would fall short of the two-quarter minimum needed to qualify as a recession, it would nonetheless be a cause for serious concern. And economists are split over what, if anything, the Fed should do about it.

Sung Won Sohn, economist at Norwest Corp. in Minneapolis, said the economy would be “on a roller-coaster ride” for the next few months, alternating between periods of decline and some rebound as a result of the Asian crisis. He said it easily “could get worse”--quickly.

But Lyle Gramley, a former Federal Reserve Board governor, predicts that the economy will bounce back in late autumn and return to a more sustainable growth rate--in the neighborhood of the 2% to 2.5% annual pace that the Fed has been seeking--for the rest of 1999.

“The impact of the Asian economic slump is large, but there’s a pretty good bet that the bulk of it is behind us,” he said.

Barry P. Bosworth, a Brookings Institution economist, agrees. Bosworth contends that the falloff in inventory-building is a onetime correction that is unlikely to affect future quarters. Once it is over, he says, the economy will continue at a slower, yet acceptable pace.

Indeed, many economists believe that while manufacturing will continue to weaken, there is still so much force in the economy that most Americans will hardly even know that it no longer is booming at the robust pace that it has maintained for the last few years.

Their reasoning: Overall confidence remains so high--and consumer spending so strong--that much of the economy may remain unaffected. The biggest potential glitch: a stock-market decline that sends consumer spending plunging.

Many economists believe that the coming months will see a “split” economy in which the manufacturing sector remains weak while the service industries, which make up the bulk of the economy, stay robust.

As Greenspan noted on Tuesday, the economy’s performance over the last few months has been nearly picture perfect: The unemployment rate has been at 4.5% or below. Job growth has remained strong. And inflation has remained below 2%.

That, Sinai said, is “as good as it gets.”

The Fed’s updated forecast, which Greenspan made public Tuesday, calls for the economy to grow by 3% to 3.25% this year and 2% to 2.5% in 1999--a bit higher than it had predicted in February. It also expects the unemployment rate to remain about 4.5% for the rest of 1998.

With such wide differences in predictions over how the economy will fare over the next few months, economists are understandably almost as divided about what policies the Fed will follow to cope with any problems that may arise.

David Wyss, economist at Standard & Poor’s DRI, predicted that despite Greenspan’s resolve to keep Fed policy unchanged, the weakening economy eventually would force the central bank to “step in and do something” by cutting interest rates early next year.

But Norwest’s Sung Won Sohn contended that if the economy rebounds somewhat--as he and some other analysts predict--then the Fed would be obliged to raise interest rates during the first or second quarter of next year. With labor markets so tight, wages could soar overnight.

Greenspan himself was relatively bullish on Tuesday, telling lawmakers that although the U.S. economy “appears to have slowed sharply” from the first quarter’s pace, its performance “continues to be impressive” even in the face of the General Motors strike.

Just the same, there’s a wide expectation that, whatever its ultimate consequences, the second-quarter sputter marks the start of a down-shifting that is certain to leave the economy growing more slowly from now on.

MARKET BEAT: The stock market’s Fed fears may be overblown. D1

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Eye on the Economy

Federal Reserve Board Chairman Alan Greenspan told Congress that despite some adverse data, much of the economy is still doing well. Here are some of the major factors affecting the economy:

POSITIVES

* In response to Asian slump, interest rates have remained low and world oil prices have dropped sharply.

* The dollar’s value has gone up, driving import prices down.

* While manufacturing is weak, other sectors are strong--consumer spending, business investment and the service industries.

****

NEGATIVES

* Asia has cut back orders from U.S. manufacturing firms.

* Inventories are high and orders are down after U.S. businesses went on a buying spree earlier this year.

* Impact from GM strike has begun to widen, hurting suppliers.

Compiled by ART PINE / Los Angeles Times