US economy bouncing back. But growth is still likely to be modest through the end of 1985
Happy New Year. The federal government starts a new budget year today, and fiscal 1986 brings some glad tidings.
Perhaps the brightest is that the United States economy shows some signs of rebounding after languishing for much of fiscal 1985.
On Monday, the Commerce Department reported that its index of leading economic indicators, used to forecast economic activity, rose a solid 0.7 percent. This matched the index's revised gain for July. The index figures for July and August were the strongest since February's 0.8 percent growth rate. -cc14p-
But despite this upbeat sign, most forecasters say the outlook is for modest, not torrid, growth in the rest of 1985. And more than half of the nation's business economists still see the US economy drifting into recession before 1986 ends, a new survey shows.
One reason for this gloom is that the worst of the old fiscal year's problems remain. The government closed its books on budget year 1985 Monday with a record $201.3 billion in red ink splashed across the ledger, according to official estimates.
In fiscal 1986, which begins today, Uncle Sam is expected to go another $172 billion into debt. Unless Congress raises the debt ceiling from its current $1.823 trillion level by Oct. 15, the government will not be able to borrow enough to cover its bills and will run out of money. The Reagan administration has asked Congress to boost the debt limit to $2.079 trillion, double its level when Mr. Reagan took office.
Unsettled economic conditions created in part by the federal budget deficit are expected to tie Fed policymakers' hands at today's meeting of the Federal Open Market Committee. The committee meets eight times a year to decide whether to change credit conditions. Most analysts say the Fed will not tinker with the monetary-policy control dial at this week's meeting. That would tend to let interest rates remain at the current levels for the near term.
``It has seldom been the case that the Fed looks as boxed in as it is right now,'' says Paul Boltz, vice-president of T. Rowe Price Associates Inc., an investment firm. Last week's agreement among the five most industrialized nations to try to bring down the value of the dollar on international currency markets is one factor tying the Fed's hands.
The Fed ``can't afford to tighten [credit] too much,'' notes David Wyss, senior vice-president of Data Resources Inc., a forecasting concern.
Tighter credit would boost US interest rates, making dollar investments more attractive to foreigners. That would tend to increase the greenback's value relative to other currencies, exactly the opposite of what five industrialized nations agreed to do Sept. 22.
But ``it is hard to see [the Fed's] loosening much either,'' Mr. Wyss says, because the money supply has been growing rapidly and the economy is looking somewhat stronger. With the economy already showing signs of reviving from its first-half doldrums, the Fed is likely to worry that more generous credit conditions could let inflation out of its cage.
In addition to the index of leading indicators, another sign of economic strength came Friday when the government reported that the nation's merchandise trade deficit dropped to $9.9 billion in August, its lowest level this year and 26 percent below June's peak trade deficit. Surging imports and weak exports are a key reason the economy has been weak.
Still, most forecasters are not about to break out party hats. A new survey of nearly 350 members of the National Association of Business Economists (NABE) predicted inflation-adjusted economic growth of 2.5 percent in 1985 and 2.8 percent in 1986. In 1984 the economy grew 6.8 percent. Forecasters say the economy must grow from 2.75 to 3 percent a year to keep the unemployment rate from rising.
The business forecasters are significantly less optimistic than the Reagan administration, which predicts 3 percent growth this year and a stronger 4 percent rate in 1986. White House spokesman Larry Speakes said figures on the leading indicators serve ``as further evidence that a rapid improvement in economic performance is under way in the second half.''
Slightly more than half of the NABE members (52 percent) expect the nation to be in recession by the end of 1986. A year ago, 87 percent of NABE members saw a recession in 1986. NABE vice-president Kathleen Cooper said the economists who expect a recession feel the budget deficit will derail the economy. High budget deficits tend to push up interest rates, many economists say. CHART: INDEX OF LEADING INDICATORS (percent change from previous month) 3% 2% 1% 0
1% 3% 2% 1% 0
1% A S O N D J F M A M J J A 1984 1985 Source: Commerce Department