Washington faces a balky economy, teetering on the edge of recession and tired from the past four years of slogging along. According to a corral of economists, the economy will in fact slow this winter to the point where real growth will be tough to spot. (Looking back at 1986, Page 14.)
For the first half of 1987, Merrill Lynch Economics predicts only 1 to 1.5 percent of real growth. Stuck in this rut, Merrill Lynch senior economist Martin Mauro says, ``the economy is susceptible to any kind of shock.'' John Paulus, chief economist at Morgan Stanley & Co., says he thinks there is a 30 percent chance of recession.
By late spring, however, a thaw could take place that will keep the economy from sliding into a recession. By year-end, DRI Inc., an economic forecasting service in Lexington, Mass., says real growth will be back to the 3 to 3.5 percent range. ``It won't look much different from this year,'' says David Wyss, DRI's chief financial economist.
This slow growth will keep pressure on the Federal Reserve Board to keep interest rates low. ``Policy will err on the side of ease,'' predicts Robert Dederick, chief economist at Northern Trust Company in Chicago and a former Reagan official in the Commerce Department. But the Fed will not be overly expansive, he adds, since it will also be watching the value of the dollar and any signs of inflation. ``The Fed will raise the anti-inflation flag once in a while,'' Mr. Dederick says.
Here's how economists view 1987:
Gross national product. This measure of the nation's goods and services will show only sluggish growth at best. In its December poll of 51 economists, Blue Chip Economic Indicators in Sindona, Ariz., reports the consensus for 1987 is for 2.5 percent real growth. The Blue Chip economists have been turning pessimistic all year, dropping their forecast from 3.5 percent in June. ``This is more than normal,'' says Robert Eggert, who runs the service. Only three of them see an outright recession.
Consumer spending. Consumers led the economy in 1986. But in 1987 they are expected to be more reluctant to spend. Sandra Shaber of Chase Econometrics says lower oil prices gave consumers a $20 billion windfall this year. ``You can't count on that again,'' she says.
Car companies bought sales with incentives, which may cost them sales in '87. Some firms have raised prices, shielded from foreign competition by the falling dollar. High car payments handcuff many consumers.
Consumer debt, in fact, is at record levels. But, Bank of America chief economist John Wilson notes, consumers have also increased the cash in their pockets and the value of their assets. This is in large part due to the surge in the stock market. Thus, he sees no debt crunch that could send the consumer and the economy reeling. He also says the ``tax-reform bill will reduce personal taxes, increasing the after-tax income of consumers.''
Capital spending. To take advantage of the old tax law's better depreciation rates, companies have moved a lot of next year's projects into this year. As a result, capital spending will lag in early 1987. Corporate taxes will rise by $25 billion next year because of the new tax law. This will limit new-plant spending. ``Companies just won't have the money,'' DRI's Wyss says.
Unemployment. Sluggish growth will keep unemployment at about current levels of between 6.8 and 7 percent. In the first quarter, DRI expects there could be a blip upward to 7.2 percent. Northern Trust's Dederick says the problem with a ``chug-along'' economy is that it passes many people by. ``If you're one of those people, it's not much fun,'' he says.
Inflation. Economists doubt that the Organization of Petroleum Exporting Countries will do much more than stabilize oil prices. ``There's too much oil and too little economic activity,'' says Ms. Shaber of Chase. Wilson of Bank America predicts inflation will rise to 2.8 percent, while DRI expects a 4.5 percent rate. Without much demand, one of the only tugs on prices could come from bad weather in the farm belt. ``That's always a wild card,'' agrees Mr. Mauro of Merrill Lynch.
Trade deficit. Policymakers will finally get some good news here. The lower-valued dollar has made many foreign goods less competitive. Unfortunately, the numbers in the trade deficit will not immediately reflect this, since the fewer imports are now more expensive. ``We've gone from insane to bad,'' Wyss says.
But with Americans buying more US-made goods, economists say this will keep the US out of a recession in the first half. Some economists, particularly in the White House, say it will give the economy some pep. But Shaber of Chase says it will merely prevent a recession.