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M-2 Finally Grows But Gloom Persists

MOST economists figure Gov. Bill Clinton will win the presidency next month. At least that's what a survey of 52 economists by Blue Chip Economic Indicators earlier this month found. More than three-fourths forecast the Democratic candidate's election.

"That's the best thing [President] Bush has going for him," jokes Paul Kasriel, monetary economist for Northern Trust Company. "When was the last time an economist was right?"

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Most economists also predict the recovery will pick up some vigor next year - but not much. The Blue Chip consensus says the growth rate for national output next year will be 2.7 percent. That's better than the 1.8 percent anticipated this year.

Faster growth, of course, will ease the political problems of the 1993 president. But 2.7 percent won't bring down unemployment much, considering the rapid growth in productivity.

Indeed, Lacy Hunt, US chief economist HongkongBank Group, sees productivity growth as temporarily part of the problem, since it is the result of cost cutting through widespread layoffs.

Mr. Kasriel and some other economists are encouraged by recent growth in the nation's money supply - the fuel for business activity. A broad measure of money known as M-2 grew at a 3.6 percent annual rate in September, which is faster than the current inflation rate of about 2.5 percent. In real terms, M-2 had been shrinking since last February. M-2 includes currency, checking accounts, some savings accounts, and money market mutual funds.

"There are signs of life out there," Kasriel says. "But one month of real M-2 growth does not a trend make."

If money grows for a few more months, however, there could be a speedup in business activity - "about the time a new administration steps in and kicks up a fiscal stimulus package," he adds.

Mr. Hunt is more pessimistic. M-2, he notes, is still 4 percent below its peak in May 1988. He's forecasting an annual growth rate of a mere 0.3 percent in the present quarter and 0.7 percent in the first quarter of next year. And he lists a number of negative factors in the economy: poor sales of automobiles and light trucks so far this month; high and rising long-term, after-inflation interest rates (4.6 percent versus a "normal" 2.87 percent); exports down in eight of the last 10 months; the defense i ndustry (5.5 percent of national output) still shrinking; many empty commercial buildings; a severe glut in airline seats depressing the airplane construction and engine industry; oil and gas drilling at a post-World War II low; and industrial commodity prices down 3 percent in the last four weeks.

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Further, the slump in Germany and Japan is worsening. Japan's overall economy is barely growing, hit by a sharp drop in both industrial production and stock prices. Dr. Martin Hufner, chief economist for Bayerische Vereinsbank, predicts a decline in Germany's output through the first half of 1993. "We are sliding into a recession," he says. A concerned Bundesbank, Germany's central bank, positioned itself this week to lower interest rates.

There are economic optimists. Michael Keran, chief economist of Prudential Insurance Company of America, says US output will grow at a 2.5 percent annual rate in this second half of 1992 and 4 percent next year. That cheery view is based on a thesis that the economy has been held back by recently imposed capital requirements on banks and thrift institutions, resulting in a squeeze on business loans. He estimates these tougher rules reduced real gross domestic product by 0.6 percent in 1989, 3 percent in 1990, 2.5 percent in 1991, and 1.5 percent in 1992.

"The only way this regulatory factor can be neutralized in the short run is via easier monetary policy," Mr. Keran holds. Current "monetary ease is sufficient to generate a recovery."

And there are pessimists. Robert Parker, a Wall Street economist, worries about a repeat next year of the 1981 situation, when the Reagan administration cut taxes, raised defense spending, and ballooned the federal deficit. But the Federal Reserve kept a tight monetary policy, refusing to finance the deficit with new money. As a result the economy slumped seriously. "If we do what we did in 1981, I am going to predict a depression," Mr. Parker says, speaking of Clinton's plans to boost the economy with n ew spending. "I hope the money supply soars."

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