A forecast of growth, and puzzlement over why it's not upon us

Frank A. Morris, one of those 12 men and women determining the nation's monetary policy, makes up his own economic charts. ``I was an economist for so long, I got used to doing it,'' says Mr. Morris, president of the Federal Reserve Bank of Boston, explaining why he doesn't give his staff the task.

Reading those hand-inked charts, the central banker predicts ``a good strong economy in the last half'' of this year and a modest pickup in the rate of inflation as the impact of declining oil prices and weak food prices passes through the economic system.

Morris, however, shares a common puzzlement with Karl Otto P"ohl, president of the Bundesbank, West Germany's central bank: Why haven't strong monetary stimulation and other favorable economic fundamentals already produced faster growth?

In Germany, Dr. P"ohl told the press here recently, the ``central bank money stock'' has been growing at an 8 percent annual rate, well above the Bundesbank's 3.5 to 5.5 percent target. That should normally boost output.

Yet, growth in the output of goods and services ran at a 2 percent annual rate in the first quarter, well below the 3.5 percent growth rate forecast.

``Rather disappointing,'' P"ohl said.

In the United States, first-quarter growth in gross national product (GNP) was just revised downward to a 2.9 percent annual rate. But there have been signs of slower growth in the current quarter.

Morris's optimism for the economy hangs on several good trends. Stock market prices are up. That means the cost to business of raising capital is down. And shareowners feel more wealthy.

With mortgage rates down, housing is booming at something like an annual rate of 2 million starts a year, rather than about 1.7 million last year. This will increase the demand for household goods as well.

The drop in the price of oil hurts oil-producing areas of the US. But it provides most Americans more income to spend on other products, notes Morris, senior member of the policymaking Federal Open Market Committee.

Further, the decline in the value of the dollar on the exchange markets should invigorate manufacturing. ``It has already started to happen,'' says Morris. Whereas an increasing trade deficit depressed the growth in GNP below the growth in total domestic demand for several years, that pattern should now be reversed.

Morris is uncertain, however, as to the timing of the economic pickup. ``Real strength may be in the fourth quarter,'' he guesses.

After deducting food and energy from the inflation indexes, he sees the current ``core'' inflation rate as roughly 4 percent, about the same as a year ago. Despite the inflationary impact of a weaker dollar, he does not expect inflation to bubble up higher than that level, because moderate wage increases and some acceleration in productivity as the economy picks up should keep unit costs of business from rising much.

Although the basic money supply (M-1) has been rising at a historically high level, Morris does not regard that trend as potentially inflationary. In contrast, economists of the monetarist school have been predicting much faster inflation for at least two years -- incorrectly so far.

Mr. Morris sees two reasons that the historical relationship between rapid money growth and faster inflation does not hold today.

One is that only M-1, composed of checkable bank accounts and currency in circulation, has been growing well above the Fed's own targets. Broader measures of money that include some elements of savings have been growing more slowly and within the Fed's targets.

Morris predicted in 1982 that because of innovations in the financial markets, M-1 would not be a reliable indicator of monetary policy. He holds that it no longer accurately measures the balances that individuals and businesses use to conduct transactions.

``That is one of the best forecasts I have made,'' he says. ``There is no way we can separate transactions balances from other liquid assets'' when measuring money. So he prefers looking at total liquid assets as a guideline for monetary policy.

The other factor that gives Morris confidence in his low-inflation forecast is that the decline in interest rates makes it less urgent for holders of money to spend or invest it quickly. Because of lower interest rates, the ``opportunity cost'' of holding money in non-interest- or low-interest-bearing checking accounts has shrunk. So the velocity of money -- how often it turns over -- has not grown steadily, as it had in the past.

Morris thus maintains: ``Central banking is a matter of judgment. [Economist] Milton Friedman's idea that you can pick some [money-supply] rule and follow it through hell and high water doesn't make sense. The relationship between M-1 and nominal GNP is a random walk.''