Fed meets this week amid fresh signs of slower economy
United States economic growth is slowing but is not likely to grind to a halt in the near term, new government figures suggest. Some forecasters say the slower growth, coupled with the relatively low inflation rate, could prompt the Federal Reserve Board to ease credit conditions at a meeting to set monetary policy being held this week. Recent Fed action to reduce pressure on interest rates was one reason that many major banks trimmed their prime, or benchmark, lending rates last week by one-quarter of a percentage point, to 12.75 percent, analysts say.
The Commerce Department reported Friday that its index of leading economic indicators rebounded in August after posting declines the previous two months. The index is designed to signal future trends in the economy.
The figures help confirm that the nation is undergoing ''a slowdown, not a halt to the economic expansion,'' says Richard Goettle, vice-president of Cambridge Planning and Analytics Inc., an economic consulting firm.
''The indications are the economy is cooling,'' Treasury Secretary Donald T. Regan said last week. ''The Fed has taken note of this. I think the Fed has accommodated this. It was time for shorter (term) rates to drop.''
If the Fed opts to ease credit conditions further, interest rates could continue to decline in the months ahead. Most analysts, however, say that any further reduction will be modest. The Fed will ''consider easing'' them but will move ''very slowly,'' said Paul Boltz, vice-president and financial economist at T. Rowe Price Associates Inc.
On the other hand, the Fed may say ''enough is enough'' and wait to see the economic impact of the general easing of interest rates before taking additional steps, Mr. Goettle says.
Lower interest rates would help people who are seeking loans to buy homes, cars, or other big-ticket items and might also boost President Reagan's reelection effort. Fed board members traditionally worry about being charged with lowering rates in order to help an incumbent president.
In the longer term, lower interest rates also might make the dollar less attractive to foreign investors, thus reducing the greenback's strength in foreign currency markets. A lower dollar would make US-made goods easier for foreigners to buy, thus helping struggling US exporters, which include farmers and heavy-machinery manufacturers.
In July, the gap between what the US sells abroad and what it buys narrowed slightly to $9.9 billion for the month, the government said Friday. For the first time this century the US bought more industrial machinery from abroad than it sold there. The dollar's high value and the resulting decline in US sales overseas ''figures importantly in the slowing of the economy,'' Mr. Boltz says. The government expects to post a $130 billion trade deficit for 1984, nearly twice the record level of '83.
August's index of leading indicators rose 0.5 percent, according to preliminary and incomplete figures. The index for July was revised downward to show a drop of 1.8 percent, while June's index was revised upward to show a decline of 1.1 percent.
If the index declines for three consecutive months, many economists say, then a recession is on the economic horizon.
The rise in the leading indicators means ''a return to the strong growth pattern of the past two years,'' White House spokesman Larry Speakes said Friday.
A variety of statistics, including housing starts and retail sales, showed that the economy slowed last summer as consumers paused from their buying spree.
''There was a lull in July and August, and some speculate that we all sat in front of the TV watching the Olympics, and then returned to the shopping malls and auto dealers,'' says Roger Brinner, director of US forecasting at Data Resources Inc. (DRI), a major consulting firm.
But he notes that early data for September from car dealers and retailers hints that more spirited buying has resumed.
Coupled with the rise in the leading indicators, that leaves most analysts expecting growth for the remainder of 1984 and much of '85. But they expect the rate of growth to fall below the 10.1 percent seasonally adjusted annual real growth rate posted in the first quarter or the 7.1 percent rate recorded in the second quarter.
DRI sees inflation-adjusted economic growth averaging 3.5 percent in the third and fourth quarters of 1984 and the first quarter of '85. In the final three quarters of 1985, real growth is expected to average 1 percent, Mr. Brinner says.
The expected slowdown can be blamed, among other things, on a slowdown in the housing sector, which is already under way. And DRI also expects the economy to cool off, due to federal deficit-reduction measures passed in 1984 and additional deficit cutting action it anticipates.
The economy's precise growth path will depend on how the economy reacts to the latest reduction in interest rates, Boltz says.
Most of the nation's major banks lowered their prime rates Thursday for the first time in 18 months. On Sept. 21, Morgan Guaranty Trust Company of New York was the first to lower its prime, from 13 to 12.75 percent. The drop followed a reduction in the demand for credit, as well as reductions in the cost of the money that banks lend customers. For example, the interest rate on federal funds , the money banks lend each other overnight, averaged 10.73 in the week that ended Sept. 26, vs. an average 11.5 in the previous two weeks.
Whatever the near-term course for interest rates, many analysts expect them to rise in 1985, as strong borrowing by the federal government to cover the deficit collides with private demands for credit. Rates will ''rise through the course of 1985,'' Goettle says, to about 12 percent for 90-day Treasury bills. At last Monday's auction, the T-bill rate was 10.27 percent.