Look for the economy to slow, soon

Rising interest rates and oil prices should eventually trickle down to bricklayers and Buick dealers.

Despite its recent kinetic energy, the US economy is headed for a downturn. The only questions: when and how far?

That, at least, is what economists are predicting. Of course, they have been forecasting a slowdown for the past four years. The economy has responded with mocking disdain.

This time, however, there may be some truth in the predictions, for several reasons:

*Tomorrow, the Fed is likely to raise interest rates again - the fifth time since last July. Analysts say, at some point, the moves have to trickle down and slow everyone from bricklayers to Buick dealers.

*Oil prices have soared above $30 a barrel, putting a damper on consumer spending. Three times since 1973, a sharp jump in oil prices was followed by recession.

*The federal budget has a big surplus. By not spending the money, Uncle Sam puts another brake on the economy - at least in the short term, some argue.

"A natural cooling off of the economy," says Martin Bailey, chairman of the president's Council of Economic Advisers. "I have great confidence in [Fed] Chairman [Alan] Greenspan."

The Clinton administration forecasts economic growth of 2.9 percent this year, after inflation.

That compares to a vigorous 4.4 percent annual average since 1996. And the economy ran at a blazing 6.9 percent annual rate in the fourth quarter of 1999.

Most economic forecasters have been predicting a walking - not running - economy for at least three years. They were wrong. Now their consensus forecast says 3 percent in 2000.

The Fed has waggled its finger four times since last July, raising the short-term interest rate 0.25 percentage points each time.

Wall Street expects a similar hike when Fed policymakers meet in Washington tomorrow, especially after two inflation measures rose faster than expected last week. If that doesn't work, the Fed may act again.

Last Thursday, the European Central Bank also raised interest rates 0.25 percentage points. Like the Fed, it aims at warding off higher inflation.

In the US, the federal funds rate now stands at 5.75 percent. This rate, charged by banks on overnight loans, could go to 6.5 percent - or higher "if the economy does not slow by summer," says David Wyss, chief economist of Standard & Poor's DRI, a Lexington, Mass., consulting firm.

Watch those auto loans

The prime rate of banks, now at 8.5 percent, will rise in step. Homeowners with equity loans, car buyers getting auto loans, will see their rates zoom upward.

Economists figure the Fed will eventually dampen growth.

Last Thursday, the government reported that producer prices rose 1 percent in February - the largest uptick in nearly 10 years. The numbers were boosted by higher prices for home heating oil, gasoline, and other energy sources, and higher cigarette prices. The consumer price index upturn of 0.5 percentage points, announced Friday, may also encourage the Fed to act.

A second key factor expected to slow output is the jump in the price of oil by some $20 to about $30 a barrel. That leads to roughly an $80 billion transfer of income from domestic consumers to foreign oil producers.

"Think of it as a big tax hike," notes Lawrence Kudlow, chief economist of CNBC.

Though Mr. Kudlow sees snappy growth at a 5 percent annual rate in the first quarter, the oil "tax" could shrink the growth rate by half for the rest of the year.

But recession is not generally expected. The magnitude of the oil price rise is relatively small. After the quadrupling of oil prices in 1973-74 and their doubling in 1979, Americans began using energy more efficiently. "In just 10 years, the average number of gallons consumed annually by passenger cars alone fell by 28 percent," notes Irwin Kellner, an economist at Hofstra University in Hempstead, N.Y.

Even with more light trucks on the road today and average vehicle mileage up 16 percent from 1973, gasoline consumption per car is lower today than 26 years ago. Cars and trucks are nearly 50 percent more efficient.

Industry also has cut energy consumption. Offices, nearly three-quarters of which have been built since 1980, use more efficient heating, cooling, and lighting. They're better insulated. Last year, the total value of crude oil used by the US fell to about 1 percent of gross domestic product (GDP), the nation's output of goods and services. It was 6.5 percent in 1981.

Moreover, the crude-oil price of $28 a barrel in 1981 is the equivalent of $68 in 1999 dollars.

Nonetheless, Mr. Wyss does expect the higher oil prices to have some impact on the economy. Dollars spent on gasoline are not available for buying other goods.

The oil price hike acts as a "drag," concurs Donald Strazheim, president of the Milken Institute in Los Angeles.

Mr. Bailey, the White House economist, sees the current federal budget surpluses as another drag, meaning interest rates need not climb as high as they might otherwise to slow the economy.

Recession is remote

Despite the forces slowing growth, few economists expect an outright recession. What could create such a scenario, though, is a major stock market bust, an unexpected inflation explosion, or dramatically higher oil prices.

Cynthia Latta, another economist at Standard & Poor's DRI, predicts a 10 percent chance of such a downturn late this year. The odds rise to 35 percent in late in 2001 and 2002.

As the economy is buffeted by various pressures, many analysts see investment fads changing on Wall Street as well. Prices of major industrial stocks rose at a record pace Wednesday and Thursday. Technology stocks, which had been soaring, plunged early last week, then recovered.

(c) Copyright 2000. The Christian Science Publishing Society

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