Steps needed to keep minor slowdown from becoming a recession

If we could only take all our cues from the stock market, there would be no question about the strength of the US economy for the rest of 1986. Of course, what the stock market is doing will have some effect on the real world of business. Rising stock prices and declining interest rates make both stock and bond financing more attractive. They also help the general level of business confidence.

However, to look at the world as the monthly statistics tell us about it, the first quarter of 1986 has been rather weak. Unemployment is up, although the February jump is probably exaggerated. The latest income and spending statistics suggest a consumer who is essentially on hold after a big rise in spending and increase in personal debt in 1985.

Personal income rose .6 percent during February, and consumer spending edged up just .3 percent. This means that the saving rate rose by .3 percent. These increases in income and spending are not large. Moreover, if special factors are left out, personal income grew just .4 percent in both January and February.

Moreover, 1985 fourth quarter GNP has been revised for the second time to show growth at the rate of only .7 percent during the quarter. Congress has the option, under Gramm-Rudman, to hold the Gramm-Rudman deficit-reduction requirements in abeyance if growth is less than 1 percent for two consecutive quarters.

The GNP was weak during the waning months of 1985 because of a surge in imports. The weakening dollar may begin to affect import levels soon and help some US exports. In the face of rather obviously weak consumer demand so far in 1986, the degree of change in the first quarter GNP is likely to reflect mainly any change in the trade balance.

What with the rather weak demand in the economy, it isn't surprising that more attention is being focused on thinking at the Federal Reserve. During February there was disagreement among the seven governors as to lowering the discount rate, with the four Reagan appointees wanting to move before Fed chairman Paul Volcker and the two others were ready. Eventually, after the Germans and Japanese had lowered their central bank rates, the Fed did move the discount rate downward another notch.

It would be wrong to make a lot of the degree of disagreement at the Fed. Mr. Volcker may have passed the peak of his personal influence, but he will be remembered for engineering and sticking with the plan to end inflation. The governors now have to deal with a twin dilemma. They can't let the economy slide into a recession, which would not only make Gramm-Rudman unworkable but create huge new deficits on top of those we already have. And they must also deal with a suddenly weakened dollar, as the effect of interest rates having declined much more here than abroad, hurting business confidence and actual economic activity.

Inflation may not be dead; indeed, the oil-price decline could end by later this spring and prices could even strengthen. And it is the oil-price decline that has finally convinced observers that inflation is no longer to be feared. But whether inflation is completely licked or not, avoiding another recession for the next couple years seems to be a higher priority. Why?

Gramm-Rudman requires deficit reductions of $44 billion annually for five years. Whether the nation reaches that exact target or not, it is most important that the deficit get to under $100 billion, making its annual financing a much smaller segment of all the lending going on in the country. With a recession, we get deficits of over $200 billion again. Without one, in two years the nation may be well on its way toward budget balance.