Uncertainty clouds 1986 economy. Tax reform stall and Gramm-Rudman place forecasters at opposite ends
New Year's Eve is just two weeks away, but forecasters are sharply split on whether the economy's performance in 1986 will give Americans reason to cheer. Much of the uncertainty can be traced to Congress, economists say. Legislative clouds obscuring the economic future include the outlook for overhauling the tax system and the degree of congressional support for a recently passed balanced-budget law.
As a result of these and other uncertainties, the difference in economic outlook between the most optimistic and the most pessimistic forecasters is at a record level.
``The 10 most upbeat expect a ruddy 4.3 percent hike'' in inflation-adjusted economic growth during 1986, says Robert J. Eggert. ``The more cautious see just a conservative 1.7 percent advance.'' Mr. Eggert surveys 50 major economists for the monthly newsletter ``Blue Chip Economic Indicators.''
The upbeat forecast implies falling unemployment and decent gains in personal income. The pessimistic scenario would bring rising unemployment and only tiny increases in United States living standards.
While they differ on the prospects for growth, forecasters are in wide-spread agreement that the US economy is likely to remain recession free next year.
In a survey of corporate economists issued Monday, over 60 percent of the respondents agreed that ``the next recession is not going to start until 1987 or beyond,'' says Kathleen M. Cooper, president of the National Association of Business Economists.
The 300 NABE members who took part in the recent survey ``expect reasonably solid economic growth to continue next year, with modest inflation, flat short-term interest rates, and unemployment very close to current levels,'' Ms. Cooper said.
The NABE survey predicts real economic growth of 2.9 percent in 1986, vs. 2.5 percent in 1985. The corporate economists also see consumer prices rising 4 percent in the New Year, vs. a 3.5 percent hike this year. They expect the nation's civilian unemployment rate to average 7.2 percent both years. The prime, or benchmark, corporate borrowing rate is projected to finish both 1985 and '86 at 9.5 percent.
The course of Federal Reserve policy will be a major factor determining the prime rate and the overall outlook for 1986. The Fed's job is also complicated by the high degree of uncertainty about the outlook for 1986.
The Federal Open Market Committee (FOMC), the Fed's policy-setting panel, met yesterday and today to decide what action it should take to influence the path of interest rates in coming weeks.
Some analysts say they think the Fed will move to ease credit conditions because economic growth in the final quarter of 1985 has not been robust and because of congressional passage of a balanced-budget law. The constitutionality of that law is being challenged in court.
By cutting federal spending, the so-called Gramm-Rudman balanced-budget law could depress economic activity.
But if upheld by the courts and followed by Congress, the law could also give the Federal Reserve greater freedom to provide more credit, thus lowering interest rates and giving the economy a boost.
Gramm-Rudman could give the Fed greater freedom by lowering overall demand for goods in the economy. That lower demand would reduce the chance of renewed inflation if credit were eased.
The Fed is ``much more likely to hold steady for a while longer,'' than to ease credit conditions immediately, NABE president Cooper said. ``The signals on the economy are somewhat mixed right now. But I don't think they are convinced the Gramm-Rudman approach is the end of huge budget deficits.''
By nearly a 60-to-40 margin, NABE members who were surveyed said they had little confidence in the effectiveness of the Gramm-Rudman deficit-cutting plan.
The Fed is likely to adopt a course of ``steady as you go for another month and then ease,'' says David Berson, a senior economist at Wharton Econometric Forecasting Associates. The easing will not come at this week's FOMC meeting, he says, because it doesn't ``have enough information the economy is slowing.''
He expects the Fed to ease because the economy will slow. In his view the slowing will come in consumer spending, where car sales will not be strong. Wharton also expects the nation's trade situation to deteriorate for several more months before recent declines in the dollar help US exports in a significant way.
Both the Fed and private economists will soon have more-complete information on which to base their forecasts. Some questions about the economy's outlook will be answered Friday when the government releases its ``flash,'' or initial, estimate of fourth-quarter economic growth.
At the same time the Commerce Department will release a major revision of the nation's economic statistics, which is expected to give a clearer picture of where the economy has been and where it might be going.
And by January department stores will have totaled their Christmas sales, thus providing a better indication of consumer willingness to keep spending in the face of heavy consumer debt levels.