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Administration, economists agree: a modest recovery

By David R. FrancisBusiness editor of The Christian Science Monitor / July 13, 1982



Boston

For once Washington and the consensus of economists are in reasonable agreement - the strength of the economic recovery now under way in the United States will be modest.

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Last February, the President's Council of Economic Advisers (CEA) made forecasts of the economy widely regarded as too optimistic. Now, in a midyear review, the administration has tempered its predictions, which are not so different from an average of forecasts made by a large group of business economists.

''Our numbers are reasonable,'' said Murray Weidenbaum, chairman of the council, in a telephone interview. ''They are not off-the- wall.''

The council figures real gross national product (GNP), the nation's output of goods and services in constant dollars, will increase at about a 4.5 percent rate from now through 1983.

The early July consensus of some 44 prominent business economists or economic forecasting firms has real GNP growing at a 4 percent rate through the remainder of this year and a 3.3 percent growth rate for 1983 over 1982. So Washington is somewhat more optimistic for GNP, but well within the top of the range of forecasts by business economists.

Both the business economists and the council, however, are saying that the recovery will not be as vigorous as usual for expansions since World War II.

''The timing, strength, and duration of the recovery is going to be strongly influenced by our ability to get interest rates down,'' said Mr. Weidenbaum. Thus he was encouraged by the recent drop in interest rates.

Moreover, the drop in the money supply reported by the Federal Reserve System last Friday gave hope for a further decline in interest rates. ''That was welcome news,'' added Weidenbaum. The Fed, money market participants figure, will be able to relax its credit policy somewhat. There is also widespread expectation that commercial banks this week will drop their prime rate - the interest rate they charge their most creditworthy customers - from 16.5 to perhaps 16 percent.

The council reckons unemployment will average between 8.3 and 8.5 percent in 1983 - a little improvement from the 9.5 percent rate in June. The business economist consensus, compiled by Blue Chip Economic Indicators, Sedona, Ariz., expects unemployment to average 8.7 percent next year, but drop to 8.4 percent by the fourth quarter of 1982. So, there's not much difference here.

Looking at inflation, as measured by the broad index known as the GNP deflator, the consensus sees prices rising 6.4 percent this year and 6.1 percent next year. The CEA, in its midyear review to be released later this month, talks of inflation running about 6.5 percent. The consensus, in this case, is more optimistic than the council.

The administration's progress in battling inflation, said Weidenbaum with a touch of sarcasm, ''is one of the best-kept secrets in town. In a sense, that is a measure of the accomplishment. It falls a little bit into the category of 'what have you done for me lately.' ''

Weidenbaum admitted that a stronger recovery would be ''a plus politically'' for the Republicans in the autumn congressional elections, as well as ''desirable on its own.'' But so far, despite the high unemployment rate, the administration has not shown any signs of pressuring the Federal Reserve System to pump up the money supply to stimulate the economy. It has, however, insisted on Congress keeping the 10 percent cut in personal income taxes that started July 1.

The fact that the administration's forecast has come closer to the consensus forecast is especially interesting because the consensus forecast, on an annual basis, has proved remarkably accurate in recent years. As Blue Chip Economic Indicators note, the full year-over-year predictions are ''clearly superior'' to mere projections of recent trends.

One problem for the administration with a modest, as vs. a vigorous, recovery , is that it could enlarge the budget deficit. When the economy is growing more slowly, it generates less tax revenues. It is estimated that 1 percent less growth in gross national product means $13 billion less in federal budget receipts within two years.

The return of the money supply numbers into the target range set by the Fed pleased Weidenbaum. The critics of the central bank, he suggested, will now have to attack the Fed on the basis of the volatility of the money numbers.

Last Friday the Fed reported that a basic measure of the money supply known as M1 (checkable bank deposits plus currency in circulation) had plunged $3.7 billion to put that number well within the Fed's target range. M2, which includes M1 plus some savings deposits, was even below its target. But, some analysts note, the smaller monetary base - currency plus commercial bank's free reserves - was growing relatively fast.

Whatever, the Fed is undoubtedly happy over this mix of money numbers.

''It's nice we have that drop,'' said Keith M. Carlson, an economist with the St. Louis branch of the Fed. ''We can have a little bulge in July and still be all right.'' Economic forecasts for 1983 Percentage change (1983 over '82) Full year Real GNP Consumer percentage GNP deflator prices of jobless Wharton Econometric Forecasting 3.8 6.1 5.6 8.9 Chase Econometrics 3.7 5.9 6.2 8.8 Merrill Lynch 3.4 5.7 5.7 9.1 Data Resources Inc. 2.9 6.4 6.8 8.8 UCLA 2.8 6.4 5.7 9.4 Evans Economics 1.7 5.8 6.4 10.1 Compare: Blue Chip Consensus 3.3 6.1 5.8 8.7 Council of Economic Advisers 4.5 6.5 8.5