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Consumer doubt blurs US economic outlook

The twists and turns of the United States economy in early 1985 are especially hard to figure out, forecasters say. ``The economy recently has been emitting confusing signals as to its future strength,'' says Bernard Markstein III of the Chase Econometrics consulting firm.

This week's batch of economic statistics includes good news on interest rates, so-so reports on factory output and retail sales during the Christmas season, and bad news on consumer confidence.

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The result of these mixed signals and others is that forecasts on the outlook for the new year are unusually varied. ``Opinions are floating around to cover just about every possibility,'' says Greg Smith, managing director of research for Prudential-Bache Securities.

Still, the 50 top economists in the US now think the outlook for 1985 ``a little better'' now than they did in December, according to the latest monthly poll by Blue Chip Economic Indicators of Sedona, Ariz. The consensus is that the economy will grow 3.3 percent in 1985.

Key reasons for optimism among forecasters: the Federal Reserve's recent moves to ease credit conditions; falling world oil prices; and the absence of major bottlenecks that usually precede a recession.

The economy might be in even better shape if the federal budget deficit were reduced, according to Federal Reserve chairman Paul Volcker. He called Tuesday for a $50 billion reduction in the $225 billion deficit projected for this fiscal year. Emerging from a meeting with Senate Republican leaders, Mr. Volcker said that ``the more you do on reducing this deficit, the more favorable effect you are going to have on interest rates.''

The latest moderately upbeat news on the economy came Tuesday when the government reported that industrial production, the output of the nation's factories and mines, rose 0.6 percent in December, the biggest increase in five months.

But for the fourth quarter as a whole, production was roughly unchanged from the July-to-September period. And December's rate of increase was far below the 0.9 percent gain in July.

Another bit of upbeat news came Tuesday when Citibank and Chase Manhattan followed Manufacturers Hanover Trust Company in lowering their prime lending rates to 101/2 percent, from 103/4 percent. That brought the prime to its lowest level since August 1983. Citibank is the nation's largest bank in terms of assets, Chase is ranked third, and Manufacturers fourth.

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All other things being equal, falling interest rates tend to spur economic activity.

But two other recent clues to the economy's performance indicate that the stimulus of lower interest rates will be needed to prevent very slow growth as 1985 matures. Recent worrisome signs include:

A sharp drop in consumer confidence in December to its lowest point in over a year. The confidence index, compiled by the Conference Board, fell more than 11 points in December to 85.6, from 96.8 in November. This index is a key indicator of the economy's future course, since if consumers lose confidence they are less likely to buy goods and services.

``December's drop in confidence indicates that there may be some recent weakening in the economy which has not yet registered in the standard statistical reports,'' says Fabian Linden, executive director of the board's Consumer Research Center.

A report Tuesday that retail sales in the important Christmas selling season fell 0.1 percent compared with November. Department store sales were up a healthy 2.3 percent, but auto sales dropped 2.3 percent, the Commerce Department reported.

Some analysts say sagging consumer confidence and mixed retail sales numbers reflect consumer reaction to the economic slowdown in the second half of 1984.

``What we are seeing is not some inexplicable consumer sitting on his hands,'' says Sandra Shaber of Chase Econometrics. ``You are seeing the impact of much lower economic growth in the second half of 1984.''

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