Higher interest rates or no, two experts say recovery will last
Will higher interest rates kill the US recovery? No way! say two of the nation's leading experts on the business cycle. Dr. Geoffrey H. Moore, director of the Center for International Business Cycle Research, now at Columbia University in New York, notes that the average postwar economic expansion has lasted about three years. And as for the current expansion, ''It is looking more and more like an average recovery. I don't see any hard evidence to the contrary.''Skip to next paragraph
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In fact, the ''leading indicators'' - statistical series that point to the future direction of the economy - have been rising firmly. ''That makes it very doubtful that things will come to an end - at least very soon,'' Dr. Moore concluded.
Leonard H. Lempert, director of Statistical Indicator Associates, North Egremont, Mass., figures the recovery has at the very minimum 12 months ahead of it, and probably more like 26 to 32 months.
Predictions of an aborted recovery have ''no basis,'' he says.
Concern about the current recovery stems largely from the shortness of the last expansion, which ran from July 1980 to July 1981. It was cut off when the prime interest rate - the interest bankers generally charge their most creditworthy customers - shot up from 11.12 percent (a monthly average) in August 1980 to 20.35 percent in December 1980, a record.
''I don't see any possibility of duplicating the 1980-81 experience of skyrocketing interest rates,'' Mr. Lempert said. During the present recovery, which started last November, according to a pronouncement last week by the National Bureau of Economic Research, the prime rate has slid from some 11.85 percent to 10.5 percent. With the speculation over future monetary policy arising from the meeting yesterday and today of the Federal Reserve Board's Open Market Committee, short-term interest rates have risen slightly in recent days, but the prime hasn't moved.
''The contrast is so startling that this recovery has no relationship to the last one,'' Lempert says. But even if interest rates were to start a major climb again, you could still expect another 12 months of recovery. That's how long the 1980-81 recovery lasted after interest rates started to move up.
Mr. Lempert figures there could be some stiffening of interest rates in coming months. But he regards the possibility that the 1980 escalation in rates will happen again within the next eight months as ''close to zero.''
That's not how some other observers see it. For instance, former West German Chancellor Helmut Schmidt has speculated about the possibility of the US budget deficit prompting high interest rates that would kill the recovery next year.
The Bank of International Settlements in Basel, Switzerland, a bank for the central bankers of the industrial countries, is also concerned about the US deficit. In its recent annual report, it termed high US interest rates ''the single most powerful obstacle in the way of a sustained business upswing.'' It urged the United States to ''take measures, preferably in the field of expenditures, but also, if necessary, in that of taxation, to eliminate the prospect of a sharply growing structural component of the public sector's borrowing requirement.'' That refers to the portion of the deficit that will not disappear when the US economy reaches a more normal unemployment level.
Despite high interest rates, however, the US economy has moved ahead faster than most economists had anticipated. Mr. Lempert described it as a ''very average'' recovery, but not yet a ''robust, strong recovery.''
The ''flash'' estimate of the Commerce Department put the growth of the real gross national product (GNP) - the output of goods and services after removing inflation - at a 6.6 percent annual rate in the second quarter, up from the 2.6 percent rate of the first quarter. Mr. Lempert notes that since 1948, the economy has grown at a 6.6 percent annual rate or better for about one of every four quarters.
Economists have been moving up their predictions for the economy. Blue Chip Economic Indicators, which surveys 46 prominent business economists monthly, changed the color of its masthead from orange to green this month when its average prediction of real growth for this year went up to 3.1 percent, year over year. This consensus, measured by the currently popular yardstick of fourth-quarter 1983 over fourth-quarter 1982, comes to 5.1 percent. That's a bit more conservative than the 5.5 percent revised figure from the President's Council of Economic Advisers.
The group also sees the recovery continuing in 1984, forecasting on average a 4.8 percent real gain (year over year) in the output of physical goods and services.
Here are some other consensus forecasts:
Inflation: The GNP deflator - the broadest measure of inflation - will advance 4.7 percent in 1983 and a slightly higher 5 percent in 1984. The consumer price index will move up from 3.4 percent in 1983 to 4.9 percent in the year ahead.
Interest rates: Both short-term (three-month Treasury bills) and long-term (Aa utilities) interest rates will remain in a generally stable pattern this year and next, though with some small up and down shifts.
Unemployment: The jobless rate will average some 9.4 percent of the labor force in the last quarter of this year, dropping to 8.5 percent by the last quarter of 1984. The civilian rate of unemployment for June was 10 percent.