The week just past furnished more evidence of an economy going at full tilt but possibly beginning to slow under the weight of rising interest rates. And the midyear report of the Office of Management and Budget, which was a couple of weeks late in appearing, again raised the dilemma of the deficit.
OMB, the Reagan administration's own in-house economists, came up with a five-year economic estimate that would have to be called political. The average growth rate envisaged over the period was about 1 percent higher than that of the Congressional Budget Office's figures released a week ago, and that growth would be achieved by spectacularly low interest rates.
The OMB estimated that short-term rates would decline to 5 percent over the forecast period. That would be in the face of economic growth that would use up the spare capacity in the economy and, under any past set of conditions, bring back some inflation. Because of the anticipated lower interest rates and higher growth, the yearly federal deficit would decline to $139 billion by 1989, against the CBO's estimate of its climbing to $263 billion by the same year.
Given the recent record of most economic forecasters, one should be slow to say categorically that this scenario has no chance of happening. For things to work out this way, however, the normally increasing demands for credit as an economy grows would not take place. One has to assume that it is the restraint in private credit growth that drives down interest rates, since the Federal Reserve no longer has the option of turning to an easy-money policy. Furthermore , it would mean that even an economy growing faster than this one has been able to do since the 1960s did not even begin to generate any inflation because of that growth.
The administration estimate of a 4 percent growth rate through 1989 is about in line with the economy's growth during the couple of decades after 1945. It is about 1 percent higher than the long-term growth rate of the economy. But in the period after 1945, the economy had unused borrowing capacity available.
As tentative as monthly statistics are, those released during the past week indicated the constraints this expansion may already be encountering. Factories were running at 82.5 percent of capacity during July, a half-percentage point-jump over June and the highest rate since March of 1980. By industries, electrical machinery is already running at 93 percent of capacity, paper at 95.8 percent, and rubber and plastics at 95.6 percent. During the month there was another 0.9 percent jump in the index of industrial production. Without the competition from imports due to the currently overvalued US dollar, there would likely have been more pressure on prices to rise.
Housing starts during July were off by 6.6 percent; single-family starts were down 10 percent. At 1.76 million units on an annual basis, this is still a higher rate of starts than the actual number of housing units built during 1983. Building permits (which indicate the level of construction a few months out) were off 11.6 percent.
Now, housing is a case in point when one considers how fast and evenly this economy can keep growing. Housing is a major user of credit, and the price of credit is already beginning to bite there. Under either the CBO or OMB budget estimates, the government is going to have to borrow $700 billion to $800 billion more to cover its deficit over the next four years. That amount of credit will therefore not be available to finance housing or expansion by business.
A growing economy can bear some of this. But it would make the period very unlike the high-growth, low-inflation 1950s and early '60s, when federal deficits represented a relatively small claim against the annual savings of the nation.