Share this story
Close X
Switch to Desktop Site

'86 US economy more like a hay-burner than barn-burner

There will be no fireworks from the US economy during the second half of 1986. That's the emerging consensus of a number of economists who have been trimming their forecasts for 1986 in the face of a stream of lackluster reports on the economy's health.

``The pickup in the second half is likely to be somewhat delayed and somewhat weaker than had been previously expected,'' says Lawrence Chimerine, chairman of Chase Econometrics, a forecasting company. ``There is now a greater risk that it will not come at all.''

About these ads

The latest piece of the United States economic jigsaw puzzle fell into place Tuesday when the government reported that its index of leading economic indicators rose a tepid 0.2 percent in May. That was sharply below the pace of the last three months and well under the financial community's expectations.

Analysts say the index, coupled with other recent downbeat data on housing starts and sales, personal income, trade, capacity utilization, and profits, suggests that economic growth will continue in the second half of 1986, but at far from a barn-burning pace.

``The second half will be better than the first, but not by much,'' says David Wyss, senior vice-president of Data Resources Inc. (DRI), a forecasting firm. (Paul Samuelson sees ``growth recession'' -- Page 20.)

The modest outlook for economic growth is one reason that many bond-market traders expect the Federal Reserve Board to cut its discount rate in the near future from 6.5 percent to 6 percent. The discount rate is what the Fed charges member institutions for loans; it influences the interest rates consumers pay. By affecting the cost of credit, the Fed can advance or retard the pace of economic growth.

The White House appears to be jawboning the Fed on the discount rate. At a briefing Tuesday, presidential spokesman Larry Speakes said that when the current low level of inflation is considered, ``then there certainly is a historic precedent for interest rates being lower.''

The Fed panel that sets the discount rate is slated to meet next week, although many economists expect action on the lending fee to be delayed until the Japanese central bank indicates it will take a similar move. If the Fed moves alone, it could result in further downward pressure on the dollar and a variety of negative consequences for the US economy.

Several factors explain the less robust economic outlook, analysts say. One is that businesses have trimmed capital spending because they expect Congress to slash investment incentives retroactively. And slower than expected economic growth abroad means sluggish foreign demand for US goods.

About these ads

The Reagan administration is predicting 4 percent inflated adjusted economic growth in 1986. Stronger employment and economic growth ``remain likely in the second half of the year,'' Mr. Speakes said.

Some private forecasters agree. ``We expect real GNP to accelerate at a 4 percent clip during the last half of the year,'' says Edward Yardeni, senior vice-president of Prudential Bache Securities.

But others are not so sure.

``The administration's 4 percent estimate for real growth in 1986 is dead in the water,'' says Lawrence A. Kudlow, chief economist at the investment firm Bear, Stearns & Co. and a former Reagan administration official.

Mr. Kudlow says the economy will expand at a 2.8 percent pace in the second half.

If growth in 1986 does fall below the 4 percent pace assumed in both the White House and congressional budgets, the federal budget deficit will exceed current predictions and require additional politically painful budget cuts. DRI estimates that federal receipts will be $20 billion lower than in the federal budget published in February.

Follow Stories Like This
Get the Monitor stories you care about delivered to your inbox.