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US Economy Seen Perking Up By This Spring

Recent lowering of interest rates provides seeds of recovery, say many financial experts

By David R. FrancisStaff writer of The Christian Science Monitor / January 9, 1992



BOSTON

THE United States economy will snap back within the next several months, most economists reckon.

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"Recovery has been delayed," says economist David Wyss. "It hasn't been canceled."

"The seeds of growth have been planted with lower interest rates," says another economist, Robert Eggert.

The prevalent view of economists is that economic growth will pick up steam as spring rolls around. "Hopes for improvement later in the year are bright," note Mr. Wyss and a colleague, Roger Brinner, both of DRI/McGraw-Hill, a Lexington, Mass., economic consulting firm.

Economists are counting on much easier monetary policy and a slight boost from anticipated federal tax reductions, targeted at federal elections in the autumn, to get the economy moving again. Stock market investors apparently agree on a more favorable outlook. A winning streak lasted 11 days before a slight pause Monday. Then the price climb resumed Tuesday.

The US economy fell into recession in July 1990. A limp recovery began sometime last spring. Then, to the surprise of most economists and Washington economic policymakers, the slump resumed in the fall, prompting much pessimism.

Indeed, most economists have been marking down their economic forecasts at a rate not seen since 1982. A just-completed survey of 46 economists here and abroad by Globescope, a financial newsletter, finds a sudden drop in the average forecast for 1992 to a slim 1.9 percent real growth in the US, compared with 2.3 percent when the same group was polled a month ago.

Conducting a different monthly survey, Mr. Eggert, editor of Blue Chip Economic Indicators, has been talking to 50 economists across the country in the last several days. He finds a "sprinkling" of them saying that the economy shrank in the fourth quarter of 1991 or will shrink in the current quarter.

Many charge the Federal Reserve with not doing enough to stimulate recovery - until recently. The central bank "is at least partly to blame," says Nicholas Perna, chief economist of Connecticut National Bank. The Fed feared it would revive inflation.

Now, though, economists are saying that by spring national output could be growing at a 3 percent annual rate or better.

One key reason is the greater ease in monetary policy. The latest statistics show the nation's money supply - the fuel for the economy - rising again. M1, a money measure consisting of currency, travelers' checks, and checkable deposits, grew at a 10.5 percent rate in the past three months - a sign of more rapid economic growth in the next several months, in the eyes of many economists. A broader measure of money that includes some savings, M2, was growing at a less-than-inflation rate of 1.7 percent.

Economists see other reasons than monetary stringency for the current slippage.

Mr. Wyss finds weak consumer confidence and a rush of imports as a factor in the current slump. He expects these factors to reverse in the months ahead.

Mr. Eggert points to the high federal, business, and consumer debt levels as elements in the economic weakness. Japanese Prime Minister Kiichi Miyazawa cited these same factors in an interview Monday in Tokyo on the eve of President Bush's visit.

Sam Nakagama, a New York consulting economist, blames the slowdown on a "credit crunch." The growth of nonfederal debt (credit) has slowed from 7.6 percent in 1989 to 5 percent in 1990. Through September of 1991 it grew at only a 2.7 percent rate.

At the same time, Mr. Nakagama says, there was a massive reversal in the flow of international capital. In 1988, the US benefited from a capital inflow of $135.5 billion.

That inflow slowed to $87.9 billion in 1989 and $28.6 billion in 1990. In the first half of 1991 there was a flow outward, instead, at an annual rate of $52.3 billion. That, Nakagama adds, appears to have accelerated the plunge of property prices over the past two years, a key factor behind the troubles of the banks, thrifts, and insurance companies. In turn, these institutions pulled back on their lending activities.

Nakagama, one of the gloomier economists at the moment, expects national output to decline this quarter as well as last quarter. But he sees economic forecasts as "inherently unreliable," given the rapid globalization of the US economy: "People who claim to be forecasting the economy are engaging in misrepresentation."

Paul Boltz, chief economist with T. Rowe Price Associates, a money management firm, lists 10 reasons (some "silly") for an upbeat mood, ranging from the US victory in the cold war, the expected free-trade deal with Mexico, and the spread of a market economy and democracy around the globe, to the promise of President Bush not to do anything "dumb" about the economy.