Some Economists Are Plain Gloomy for 1996
BOSTON economist R. David Ranson forecasts a mild recession with falling interest rates in the United States this year. The slump may even have already started, he says.
''We successfully predicted the last two recessions and have never issued a false alarm,'' says Mr. Ranson, president of H.C. Wainwright & Co. Economics.
''The one-way risk now is monetary-fiscal overkill, economic anemia or full recession,'' says Robert Parks, a Wall Street economist. ''The probabilities are extremely high.'' A veteran forecaster, Mr. Parks says he has forecast ''six of the last five recessions.'' The extra one, a false alarm, was after the October 1987 stock market crash. He expected the diminished wealth of investors to depress purchases sharply. But the Federal Reserve quickly eased monetary policy and blocked a downturn.
Ranson and Parks are definitely among a minority of economic forecasters in their gloom. The average forecast of 51 economists surveyed by Blue Chip Economic Indicators in Sedona, Ariz., has national output growing a reasonable 2.6 percent after inflation in 1996, down from 3.3 percent last year. When surveyed last month, only six guessed that a recession would begin sometime this year and 15 said by the end of 1997.
But should there be a recession, it would be ''good news for bonds, bad news for jobs and profits,'' Parks says.
Moreover, a downturn would ''make a mockery'' of budget negotiations between the Republicans in Congress and the Clinton administration, says Ranson. The deficit would soon swell and it would become politically difficult for Washington to continue drafting a budget that wipes out the deficit in seven years.
These two economists rely on financial trends (but not stock prices) in making their predictions. Ranson figures that if short-term interest rates go up 1.5 percentage points or more, the economy slumps about 18 months later. In 1994, the Fed hiked short-term rates 3 percentage points, and the 18 months are about up.
Parks looks at the picture for commercial bank reserves, the various measures of the nation's money supply, and other financial numbers that suggest whether the economy has enough money to fuel growth. M-1, a narrow measure of money that includes checkable deposits and currency, has declined at a 5.9 percent annual rate in the latest three months, he notes. A broader measure that includes some savings deposits, M-2, has been rising at a 2 percent rate, less than inflation. Moreover, the Fed has been stripping away reserves from commercial banks - reserves of cash or deposits at the Fed that banks must hold as a security measure for customer deposits.
The granddaddy of monetarist economists, Milton Friedman of the Hoover Institution in Palo Alto, Calif., says: ''The record of economists in making short-term forecasts justifies only humility.'' Nonetheless, he adds, ''I don't rule out there will be a recession this year, but if there is, it will be a mild one.'' He says he is more certain that inflation will remain low for the next few years.
Another bearish economist, David Levy of the Jerome Levy Economics Institute in Chappaqua, N.Y., sees a 50 percent chance of a recession. ''The alternative is a weak unsatisfactory expansion with sub-1995 profit margins and rising unemployment,'' he says. Mr. Levy bases that forecast on such factors as overspent consumers, high inventory ratios, slower capital spending, and housing showing little life - all elements that signal lower corporate profits. ''There aren't too many bright areas,'' he maintains.
''It is not clear there will be a recession,'' says Allan Meltzer, another economist who follows the ''M's'' closely. He urges the Fed to cut short-term interest rates ''at least'' another 0.5 percentage points to get the money supply growing faster. ''If not, we will see very slow growth or recession by the end of the year,'' says the Carnegie-Mellon University professor in Pittsburgh.
Despite a long history of criticizing the central bank, both Dr. Friedman and Dr. Meltzer offer praise for Fed chairman Alan Greenspan. Friedman sees less volatility in the rate of change in the M's and thus less volatility in the price of stocks and gold. ''They [Fed policymakers] have been doing a better job in the Greenspan era than any other era I know of,'' Meltzer says.
A more cheery forecast is given by Susan Hickok, chief economist at Prudential Economics in Newark, N.J. Downplaying monetary numbers because of dramatic changes in the financial world, she sees real economic growth this year of 3 percent.