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Economy Seems Headed A Bit Lower and Slower

Economists point toward slide, but perhaps not a full-blown recession

THE sour smell of recession hangs heavy in the autumn air,'' says H.Erich Heinemann, a brokerage house economist. Only a minority of economists believe the current slowdown in United States business activity will be deep enough and sufficiently long to classify as a real recession.

But most economists do expect a slump that will affect the pocketbooks of many Americans.

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David Wyss, an economist with Data Resources Inc., a Lexington, Mass., consulting firm, anticipates a loss of about 500,000 jobs by spring, with the unemployment rate climbing from 5.3 percent in October to around 5.7 percent. Corporate profits will decline further. Federal revenues will decline. More junk bonds will fall into default.

Interest rates could also fall further, helping those with home equity loans or other debts with flexible interest charges. Those lower rates are also depressing the US dollar on the foreign exchange markets. On Tuesday, the dollar fell to eight-month lows against such major currencies as the West German mark and the Japanese yen. Though this trend could prove expensive for Americans traveling abroad, it should by mid-1990 give a welcome boost to US exports, economists say.

In most other major industrial countries - with the exception of Britain - economists are forecasting continued solid though somewhat slower growth next year. ``The engine of global growth is the strength of demand in continental Europe and Asia,'' said two Morgan Stanley & Co. economists, Robert Gay and Brian Mullaney in a recent newsletter.

Britain received an average forecast of 1.8 percent growth in gross national product next year, according to a survey of 38 prominent financial institutions world wide by Globescope Publications Inc., of Glen Carbon, Ill. The government of Prime Minister Margaret Thatcher has imposed a tight credit squeeze on the economy in an effort to trim inflation.

In Japan, this same group of forecasters anticipates 4.1 percent economic growth in 1990; in Canada (which tends to follow the US pattern) 1.9 percent; in France 2.6 percent; in Italy 2.8 percent; in Spain 3.9 percent; in Australia 2 percent; and in West Germany 2.8 percent. Because of the influx of refugees from East Germany and the Soviet Union, economists have been boosting their forecasts for West Germany.

Mr. Wyss, like most economists, counts on the US economy bouncing back next year from a weak performance in the current quarter. Despite the slump in defense stocks Monday, he does not expect defense spending to fall so rapidly as to drag 1990 output of goods and services down much.

The average forecast of 50 economists surveyed early this month by Blue Chip Economic Indicators in Sedona, Ariz., finds the economy creeping up at a 1.2 percent annual rate in the current quarter. The output will improve slightly to a 1.3 percent annual growth rate in the first quarter of 1990, and speed up in the remaining three quarters of next year to deliver a modest 1.7 percent rate for the year as a whole.

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The consensus estimate of these economists calls for the consumer price index (CPI), one measure of inflation, to rise 4.2 percent in 1990, down somewhat from 4.8 percent in 1989. A rise of 0.5 percent in the CPI in October, reported Tuesday by the Bureau of Labor Statistics, put the annual inflation rate for the first 10 months of this year at 4.6 percent.

Most economists figure the current slowdown is the result of an extended anti-inflationary monetary squeeze by the Federal Reserve System. Aware of the lags between monetary action and its impact on the economy, the Fed started easing the money supply ever-so-gradually last June. Revealing this move is M2, a measure of money supply growth whose components include currency, checking accounts, and some savings accounts. M2 has grown at a handsome 8.2 percent annual rate in the last three months.

Still, this monetary easing is ``too late,'' says A.Gary Shilling, a relatively pessimistic Wall Street economist. Monetary tightness, he says, takes some six to 12 months to squeeze business activity. The previous monetary tightness ``spells recession by historical standards.''

If Mr. Shilling is right, it will be the ninth postwar recession, ending a record seven-year peacetime expansion.

Gary Ciminero, chief economist for Fleet National Bank in Connecticut, also expects a mild recession, with the economy dropping sharply at a negative 2.1 percent annual growth rate this quarter and a negative 0.6 percent rate next quarter. He foresees what economists call an ``inventory correction'' - a drop off in orders as business inventories build to undesired levels. That will hit jobs.

Already the business press has noted sizable layoffs in the computer industry and on Wall Street. Reduced employment in manufacturing was offset by higher employment in service businesses in recent months. But Mr. Heinemann of Ladenburg, Thalmann & Co. says companies will soon be laying off service employees as they try to control costs.

``Shoppers are already antsy about the threat of hard times,'' Heinemann says. Whether that will affect the volume of Christmas sales is yet to be seen. But retail industry observers are already pointing to a high volume of sales early in the season, a factor that could cut profits.

Robert Eggert, editor of Blue Chip Economic Indicators and an economist himself, is somewhat gloomier than the average economist. His view arises from his concern about the heavy load of debt in the US economy. The total consumer, federal, and external debt now totals $100,000 per person in the country, twice what it was 10 years earlier, he says.

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