A Wall Street bear turns a bit bullish
Henry Kaufman, the Salomon Brothers economist and partner, who is often called ''Dr. Doom'' for his bearish forecasts on the economy and interest rates, is slightly more upbeat for 1983.
Even though Mr. Kaufman believes the economy will struggle along next year, in his 1983 projections for the credit markets he predicts that short-term interest rates will fall another 1 1/2 to 1 3/4 percent from current levels and long-term bond rates will drop another three-quarters of a percent, to 1 1/4 percent. Mr. Kaufman says the declines in rates will continue even though the government deficit will swell to $160 billion next year.
''The deficit,'' Mr. Kaufman told a gathering of reporters Tuesday, ''would be large by any measure,'' absorbing more than 50 percent of capital market borrowings next year. In past economic recoveries, the percentage of government borrowings has been much smaller.
Mr. Kaufman bases his forecast on the expected ''flow of credit.'' He estimates the demand for funds from the public and private sectors and then estimates the supply, determining interest-rate levels from the difference.
Kaufman began informing Salomon Brothers' clients of this forecast on Monday. This rather optimistic outlook for interest rates helped to spark a rally on Wall Street, with the Dow Jones industrial average climbing 24.29 points that day. Heavy trading continued Tuesday morning. Reporters besieged Salomon Brothers customers for early copies of Mr. Kaufman's projections and even before his press conference the Wall Street Journal, wire services, and some major newspapers had reports about them.
Mr. Kaufman's prediction is based on the assumption that the economy, based on real growth in the gross national product, will rise only 2 to 2 1/2 percent. He says this recovery will be one of the weakest on record. He estimates that household consumption will rise by 3.4 percent and new housing starts will finish the year at 1.3 to 1.4 million units, compared with 1 million units this year. Despite such growth, business spending would remain weak, acting as a damper on the economy.
The brightest spot in Mr. Kaufman's predictions is his belief that inflation will continue to fall, dropping to 5.2 percent next year, as against about 6 percent this year. But he says unemployment will remain high, peaking at 11 to 11 1/2 percent. He also predicts the price of oil may fall further, as all commodity prices will remain weak. Corporate profits for some companies could rise as much as 15 to 18 percent.
Even though he anticipates a weak recovery, he says the demand for funds will remain strong, and he predicts that net new credit demand will rise to between $ 450 billion and $460 billion, a record. He predicts corporations will try to re-liquefy their balance sheets by borrowing in the long-term credit markets. This shift would help to keep a positive yield curve - that is, short-term rates would remain lower than long-term rates.
The decline in interest rates, Mr. Kaufman predicts, would be beneficial to the thrift institutions as savings flows increased.
With these flows increasing, Mr. Kaufman expects mortgage money will become more readily available. This should help the housing markets.
Kaufman is critical of the Federal Reserve System. He says the Fed's current ''transitional'' policy is causing uncertainty in the financial markets. This in turn results in increased volatility. He also says the huge federal deficit is a deterrent to a significant economic rebound and is keeping real interest rates from falling. The budget deficit, he adds, is a threat to recovery in the private sector, since the government could act to crowd out all but the most creditworthy private borrowers. He indicated if real interest rates don't fall next year and if the recovery does not materialize, there is a danger the ecomomy could slide into a deeper downturn.
Despite his criticisms of the Federal Reserve, Mr. Kaufman says he would endorse the reappointment of Paul Volcker as the chairman of the Fed when his term of office expires in August. Kaufman said that Mr. Volcker ''is as well versed as anyone we have on the economy and the securities markets.'' He says the effect of not appointing Mr. Volcker or someone as qualified as Volcker would be significant.