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Reagan aide sees interest rates falling into 1988. White House outlook overly optimistic, some critics say

By Ron SchererStaff writer of The Christian Science Monitor / August 7, 1987



Washington

The White House is expecting interest rates to fall from current levels through the end of the year and into next year. At the same time, inflation will moderate and the economy will start to grow at a slightly faster pace into the election season of 1988, the administration says.

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In the annual midsession review, Beryl Sprinkel, chairman of the Council of Economic Advisers, describes the economy as ``performing well'' this year with good prospects for the next two.

Dr. Sprinkel says ``there is no evidence of a worldwide recession'' as some forecasters have predicted.

Instead, he says the economy as measured by the gross national product will expand at a 3.5 percent rate compared with a 3.2 percent rate predicted for this year.

Private economists consider the White House forecast to be on the optimistic side.

``It's a defensible forecast,'' says Robert Dederick, an economist with Northern Trust Company in Chicago, ``but it's on the high side of the boundary.''

According to the latest issue of Blue Chip Economic Indicators, a survey of 51 economists, the consensus forecast is for only 2.9 percent economic growth in 1988.

The administration forecast also differs widely with the consensus on the direction of interest rates. The Blue Chip forecast for next year shows AAA corporate bonds rising to 9.5 percent, from 9.1 percent this year.

The White House predicts a drop in long-term government rates to 7.6 percent, from a forecasted annual average of 8 percent this year. ``That's incredible,'' says Robert Eggert, editor of the survey, based in Sedona, Ariz.

If the White House forecast of an 8 percent rate for this year is correct, it would mean interest rates would have to fall from current levels.

The average annual rate for 10-year Treasury notes is currently 8.7. The 90-day annual average is 5.76 percent. For short-term rates, the administration is predicting an annual average of 5.7 percent.

The main reason for the divergence is that private forecasters expect the inflation rate to stay relatively high next year, at 4.6 percent, while the White House sees it declining from 4.8 percent to 4.4 percent this year. In explaining the White House forecast, Sprinkel says that ``concerns about a continuing reacceleration of inflation are exaggerated.''

Although oil prices have risen on Mideast jitters, Sprinkel expects them to flatten out or go down. ``There could be some modest decline,'' he predicts.

At the same time, Sprinkel says inflation problems caused by rising imports will begin to subside. The dollar has been stable for several months, which the administration expects to ameliorate the situation.

The administration's forecast is a revision of January numbers, which were overly optimistic.

Thus the White House has had to raise its predictions of inflation and interest rates.

In its economic forecast, the administration is assuming the housing sector will continue to operate at a slower rate than last year.

Housing is adversely impacted by rising interest rates. Capital spending is continuing stronger than most forecasters had predicted since many companies had expanded their factories last year to take advantage of the old tax code.

Sprinkel believes the auto industry, another important component of the economy, will show some signs of improvement. On Wednesday General Motors announced it would offer buyers low financing rates as an incentive.

``This should encourage automobile buying,'' Sprinkel says.

Unemployment will also fall next year by 600,000 workers, according to the administration forecast. This year, the White House is expecting unemployment to remain steady.

Next year, however, it is projecting a 5.9 percent rate. By 1989 it is expecting unemployment to drop even further, to 5.6 percent.

Overall, Sprinkel says, ``The prospects are good for continued growth with low inflation through 1987 and into 1989, so long as we avoid calls for protectionism and a general tax increase that would abandon tax reform.''