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Brave Predictions For a Boom in '93

By David R. Francis / January 4, 1993



PRESIDENT-ELECT Clinton has a transition group looking at monetary policy. But economist H. Erich Heinemann says the group is "not appropriate."

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The Federal Reserve System determines monetary policy. "The White House does not," says the chief economist for Ladenburg, Thalmann & Co., a brokerage house.

Nor does the economy need further monetary stimulus, Mr. Heinemann says. He estimates that real national output will grow 4.9 percent between the fourth quarter of 1992 and the fourth quarter of 1993. That's a rate far above the consensus forecast of 2.8 percent. Indeed, it is nearly the most optimistic among economic forecasters today. If Heinemann's prediction is right, Mr. Clinton will enjoy a vigorous United States economy that will eat into the federal budget deficit and bring unemployment under 7 p ercent by the end of this year. Nearly 2 million people will find jobs, Heinemann says.

Heinemann could be right this time, says Paul Kasriel, monetary economist with the Northern Trust Company in Chicago. For much of 1992, he disagreed with Heinemann's optimism, arguing that the Fed needed to ease even more to get a broad measure of money known as M2 growing faster before the recovery would step up its pace. M2 actually shrank during the four months ending last July.

Since August, though, M2 (currency, checkable deposits, small denomination certificates of deposit, and some other elements of the money supply) has been growing at a 3.3 percent to 5.7 percent annual rate. That's enough, in Mr. Kasriel's view, to fuel economic expansion at a 3.5 percent annual rate in the first half of this year.

Heinemann pays more attention in his forecasts to M1 (a narrower measure of money that includes currency and checkable deposits). M1 has been growing at an 18.9 percent rate in the last three months. Checkable deposits, those most used in transactions, have grown $110 billion last year, a record amount, Heinemann notes.

The divergence in growth between M1 and M2 last year was troublesome to Fed officials and many economists. Arguments over such monetary details may sound arcane. But they will be deliberated by the Clinton monetary policy group. Many factors influence the business cycle, and economists differ on the importance of money growth. However, few ignore money.

If the Fed persists in adding reserves to the banking system, that policy will eventually cause the economy to grow. After a while the Fed always gets it way, Heinemann says.

Both Heinemann and Kasriel say the economy is finally overcoming some of its "structural" problems. Kasriel notes that commercial banks have earned enough profits to rebuild their capital. "The banking system is in a better position to extend credit now to either the government or the private sector," he says. Indeed, banks have increased their commercial and industrial loans and other credits in the last few months.

Kasriel also expects the Clinton administration to ask bank regulators to be more lenient in applying some regulations in the hope of encouraging even more loan activity.

Heinemann sees some improvement in the debt burden of consumers and business. This should encourage spending.

Weak sales of commercial aircraft, reduced military hardware orders, and an oversupply of commercial real estate will be a drag on the economy, Heinemann says. But these sectors account for only 3 percent of national output. He expects modest gains in consumer purchases, business investment, inventory accumulation, and government spending to invigorate the expansion.

The Fed will "sooner or later" reluctantly let interest rates inch higher, he says. So Clinton "should figure out how to react." Heinemann's advice is that the new president should do nothing. A noisy objection would scare the bond market into seeing more inflation ahead and raise long-term interest rates, he says.

Clinton will undoubtedly follow precedent and sit down regularly for a chat with the chairman of the Fed to discuss the economy. But the 12 voting members of the policymaking Federal Open Market Committee can ignore his advice, as President Bush found out. The Bush administration wanted the Fed to ease monetary policy earlier to boost the economy by election time.