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Brokerage says inflation may be under control for years

Many brokerages, banks, and economic-research firms publish periodic newsletters on economic trends. As a service to readers, and without endorsing any particular views, the Monitor presents excerpts from some of these newsletters.

We expect that the inflation rates will head down over the next five years toward very low levels, perhaps as low as zero. This disinflation cycle is a function of deregulation and, as a result, we expect to see a de-leveraging of the private sector's balance sheet and a significant rise in household savings. A lot less debt on the balance sheets in the private sector means that consumers in particular are going to be rearranging their asset structure, specifically the mix, by switching a large portion of tangible assets to financial assets. In an inflationary period, such as 1960-80, inflation had become the handmaiden for debt creation, and that debt creation was used primarily for the accumulation of tangible assets. It has been obvious for a number of years that the most significant investment vehicle in an inflationary environment for the individual consumer had been the housing market via debt leveraging. The same was true for businesses as they added debt leveraging across the board to their balance sheets, to acquire tangible assets.

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- Dean Witter Reynolds Inc., New York

Stable money growth is no doubt a fine-sounding objective, cl11but it is a worthwhile end only if it is a result of sound credit and fiscal policies which are effectively designed to produce a respectable rate of economic growth and moderate inflation. There is, moreover, a minimal level of economic performance which is tolerable in today's US democratic society. Now, when we are barely out of the worst recession since the 1930s, it should be obvious to any reasonable government policymakers that this is no time to worry about runaway economic growth and inflation.

- Wright Investors Service, Bridgeport, Conn.

Contrary to earlier fears, the economy shows no signs of stalling. Private nonfarm employment grew in April at an annual rate of 3 percent from its first-quarter average, compared with less than 1 percent in the first quarter. And the workweek continued to lengthen. As the recovery persists, confidence naturally is building. Consumer surveys, for example, have shown sharply improving sentiment for three straight months. Business confidence readings have also strengthened. Moreover, capital investment activity has held up better during recent months than had generally been expected. And in Europe, encouragingly, several countries are showing incipient signs of cyclical upswing.

Meanwhile, apprehension about a turn toward tightening by the Federal Reserve has disappeared as the growth of the monetary aggregates has slowed. Indeed, debt-market sentiment has become increasingly positive as a substantial and growing volume of securities has been marketed at declining yields.

- Morgan Guaranty Trust Company, New York

Efforts to expand economic activity, in part by lowering US interest and exchange rates, are positive developments for all US producers. We continue to expect, however, that the competitive edge for internationally traded goods produced in the US lies in high-value-added products. Freer trade and a weaker dollar improve the bright horizon here. For much of smokestack America, free trade is not good news. One final point here, a great many of the competitive high-value-added industries within the US are high-technology information age companies. Some areas of basic industry, however, reflect these strengths and should be able to compete. For example, basic petrochemical product capacity is in great excess, and little prospect exists for strong growth. Many Middle East nations have chosen to build their own plants. Thus, our strength as an exporter of commodity chemicals will not return. Specialty chemicals producers, however, are in a stronger position. Their fate is less tied to protection in Washington.

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- E.F. Hutton & Co.,New York

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