Long-term outlook for economy turns darker. Interest rates continued to rise yesterday, spelling trouble for the bulls on Wall Street and the economy in general. (Stories below, Page 5)
Two years from now the economy will be staggering through a recession, or possibly worse, a depression. The thesis of best-selling novelist Paul Erdman? Yes. The subject of a current best seller by economist Ravi Batra? Yes. The cover story of several national magazines? Yes.
Normally gloom-and-doom forecasts have short shadows. Their biggest fans are advocates of gold investments or authors capitalizing on the public fears of economic disaster.
But surprisingly, an increasing number of traditional economists are coming to share these concerns.
In long-range forecasts, they see the United States economy unraveling, presenting the next president with his first major domestic crisis.
They outline various scenarios usually involving a collapse of the dollar and rising interest rates. Some see an economic maelstrom beginning in the Tokyo stock market and spreading to the US.
In its September outlook, Blue Chip Economic Indicators, a survey of 50 economists, found that 76 percent expect a recession in 1989, compared with 50 percent of the economists surveyed a year ago. Last week the National Association of Business Economists, meeting in New Orleans, polled its members and found that most predict a recession in 1989.
Skeptics point out that many economists predicted a recession for this year. Still more have turned thumbs down on next year. ``There is lots of gloom and doom and outright errors,'' says economist Alan Reynolds of Polyconomics in Morristown, N.J.
In fact, despite some jitters in the stock and bond markets, ``right now there are no imbalances or early warnings to the economy,'' says Mickey Levy, chief economist at Fidelity Bank in Philadelphia. He notes that the Federal Reserve Board has tightened up money supply some, but adds, ``not enough to adversely affect growth through mid-1988.''
The key move to watch beyond mid-1988, he says, is the reaction of Federal Reserve Board chairman Alan Greenspan if the US dollar falls.
Mr. Greenspan himself is reportedly bullish. Fortune magazine says the Fed chairman now believes the recession he had forecast for late 1988 can be averted.
Mr. Reynolds blames some of the dark outlook on politics. ``There is a political demand for someone to talk about the horrors ahead, if you are trying to unseat Republicans with unemployment at below 6 percent,'' he says.
Part of the problem is predicting something as complex as the economy 18 months in advance. ``When you are looking that far ahead,'' agrees Robert Eggert, publisher of Blue Chip Indicators, ``you need to have some modesty.''
Modesty aside, Mr. Eggert, a former economist at RCA Corporation, himself predicts a sharp but short downturn in 1989. ``We're going to get hit by some of the things we've been putting off,'' he says.
What have we been putting off the most? ``Paying our debts,'' Eggert replies.
Reasons for the downturn spill out of economists like waterfalls.
Sung Won Sohn, chief economist at Norwest Corporation, a Minneapolis bank holding company, envisons a sharp drop in the value of the dollar as the accumulated US trade deficit approaches the trillion-dollar level. To attract investors, interest rates spike sharply, resulting in economic freedom of the United States. Translation: a recession.
George Gols, an economist with Arthur D. Little Inc., in Cambridge, Mass., admits that he has been predicting a recession so long that he ``was getting a little afraid to walk down the hall.'' Now he feels more confident that all the financial imbalances - the trade deficit, the budget deficit, the international debt situation - will not correct themselves smoothly. Instead, he sees a period of bleakness that will cause business to overreact, bringing on a slump. ``If you know a bridge player's idea of vulnerable, we're about as vulnerable as we can get,'' he predicts.
There are degrees of pessimism. For example, Albert DePrince, chief economist at Marine Midland Bank in New York, predicts a typical business-cycle downturn. Interest rates, which have been rising, eventually reach the ``critical mass'' level necessary to take the steam out of the economy. ``It will be of modest duration with a modest loss of GNP,'' he predicts.
Of course, there are also a score of non-traditionalists warning of more than a moderate cyclical correction. For example, Dr. Batra, a professor at Southern Methodist University in Dallas, is author of ``The Great Depression of 1990.'' He takes an almost mystical view that a long-term cycle leading to an economic depression is about to snap the nation like a Canadian cold front. What is the most telling sign of the cycle? According to Batra, it is the concentration of wealth, which he says is assuming the ``the menacing levels of the 1920s.''
A more conventional doomsayer is Peter Peterson, secretary of commerce under Richard Nixon. In a cover story titled ``The Morning After'' in this month's Atlantic magazine, Mr. Peterson points to almost every economic malady confronting the nation and warns that failure to solve them will result in a gale for the economy.
``I don't think we will slide into a 1930s-style depression, because we have social security, the FSLIC [Federal Savings and Loan Insurance Corporation], and a government with a large role in the economy,'' says John Langum, president of Business Economics Inc., in Chicago. Instead, Mr. Langum, publisher of the Langum Report on the American Economy, is predicting a recession beginning next year. Unemployment, he predicts, will hit 8.5 percent by 1989, up from less than 6 percent today.
The increasing pessimism, says Giulio Martini, an economist at New York brokerage house Sanford C. Bernstein, comes ``because a lot of economists are looking at the economy from the standpoint of the financial markets.'' Mr. Martini expects the economy to perform better than the stock market, which is starting to show signs of ending its five-year bull move. Like others, however, he believes the current strength of the economy could lead to hard times by mid-1988, when the Fed tightens credit in response to a rising inflation rate and sinking dollar. ``The end result is a recipe for a recession,'' Martini concludes.