Peeking at '86 economy indicates modest growth in US should continue
HOW good is 1986 going to be? First of all, recession doesn't seem to be in the offing. Despite the fact that 1986 will be the fourth year of economic expansion, almost all of the debate among economists is whether it will be a ``muddle through'' kind of year or somewhat stronger.
There are heavy unknowns. Some of them will be answered only as the year progresses. Will the consumer fall back, or will he step up and begin spending and borrowing heavily again? There are arguments both ways on this. Debt ratios are high, but there are some offsets in the way the numbers are calculated that may overstate the burden of debt on the average family.
The drain on the GNP from the trade deficit is another unknown. It is generally assumed that a falling dollar will begin to reverse the huge trade deficit. There is a lag in this, but if there is to be an effect, it should begin to be felt by midyear. The problem here is that it's not at all certain that a cheaper dollar will actually do that much for the trade deficit. It will be easier to sell some United States products abroad. But the imports that have become well established here over the last five
years are not going to be immediatedly affected by the exchange rate. In fact, in most cases foreign manufacturers will accept lower profits (as they did in the early 1970s when the dollar had an even bigger fall) so as to keep their plants operating and their workers employed.
One of the most unusual features of the current business cycle has been the behavior of capital spending. Spending on plant and equipment went up very early in the cycle under the incentive of the Reagan tax cuts. Now, with capacity utilization rates only in the 80 percent area, business is reluctant to increase capital spending. The threat of a tax reform that would be punitive to business will also increase its hesitancy to spend in 1986.
Much money also went into multiple unit housing early in the cycle because of the incentives of the tax cuts. Actually, too much money went into housing in some parts of the country, and sections of the South have surplus apartments on their hands today.
Yet, the fact that housing is not making major demands on credit markets and that capital spending is not strong, as it usually is toward the end of a business cycle, may operate to extend the cycle. How? By not escalating credit demands beyond the ability of the Federal Reserve to increase the money supply, and thus not causing the run-up in interest rates which usually marks the end of the cycle.
Another unknown about 1986 is the overhang of foreign debt in the banking system.
The banking system has been through three years of debt restructuring. Most of the foreign debt is still treated as though it is a good asset on banks' books. One hopes that it is. But there is a persistent body of opinion that slow growth around the world is going to lead many debtor nations to force the issue on their debt.
This doesn't mean it will be written off. It could mean that it would be renegotiated, with the banks taking a partial write-down; this would affect their ability to make new loans. In particular, some of the new democratically elected governments in South America face a practical limit on how much austerity they can wring out of their populations.
So it's most likely another year of slow growth. For the exact numbers, watch how the consumer shapes up, watch the foreign-trade deficit, and watch for any possible crisis on the foreign debt scene.