Trend of the economy; Today's planned recession and joblessness: what they mean for inflation a year from now

The October jump in the unemployment rate to 8 percent of the labor force in the United States should be no surprise. The recession was planned. Says economist Otto Eckstein, president of Data Resources Inc.: ''This is not a spontaneous, private recession at all.''

Indeed, it was a ''deliberate act,'' as Dr. Eckstein put it - a decision by the Federal Reserve Board to slow the economy in order to bring down the rate of inflation. That decision was made even before President Reagan took his oath of office. So the slump could be dubbed a ''Volcker recession,'' after Fed chairman Paul A. Volcker, more accurately than a ''Reagan recession.'' Politically, it could harm Republican prospects in the congressional midterm elections next fall. Probably not too many voters understand the long lag between a monetary policy decision and its impact on the economy itself.

However, the Fed's firm policy did have the backing of the Reagan administration. ''I don't think that Volcker could have been this tough if Reagan didn't egg him on,'' said Dr. Eckstein, whose firm makes regular economic forecasts.

One of the major economic planks of the Reagan administration has been a so-called ''monetarist'' credit policy involving a gradual reduction in the growth of the nation's money supply - the fuel that keeps the country's economic fires burning.

Last month Treasury officials criticized the Fed for not pushing growth of one important measure of money, known as M1-B, sufficiently hard to bring it within the Fed's own target range. Basically, though, the President and the key officials in his administration do support a tight credit regime.

Unfortunately, one side effect of such a policy is an economic slowdown. Worse, it is extremely difficult to gauge in advance the depth of such a slowdown. Last week's statistics indicate the recession may be more serious than previously anticipated.

Dr. Eckstein had figured the current recession would last about one year to mid-1982. Now he suspects it could continue into the third or even fourth quarter of 1982. What happens, he says, depends to a considerable degree on whether the Fed permits M1-B - defined as the total amount in financial transaction accounts and cash in circulation - to grow at the lower end of its target range of 2.5 to 5.5 percent, or somewhere in the middle around, say, 4.8 percent.

If the Fed sticks to the lower end of the target, he calculates, unemployment will rise above 9 percent, housing starts will stay around what the construction industry considers a disastrous 1 million per year level, and auto sales will run below 9 million. That level of car sales could put Chrysler out of business.

''That's close to Thatcherism,'' said Dr. Eckstein, referring to the stern economic policies of Britain's prime minister.

But will such a hard recession cure inflation? Dr. Eckstein and an economist with the Federal Reserve Bank of San Francisco, using computers models, arrive at contrasting answers.

Dr. Eckstein is pessimistic. His firm, using an econometric model of the economy based on historical data, ran a simulation of a tight monetary policy for the years 1980 to 1984, a policy that would keep growth in real terms to some 2.1 percent a year. It found the inflation rate trimmed by 1.2 percentage points by mid-1982, wage increases trimmed by 0.7 percent as the weak economy discouraged high wage settlements in 1982, and unemployment peaking at 8.4 percent.

A more optimistic prospect was produced by another econometric model, that of William G. Dewald of the San Francisco Fed. Running his mathematical equations and statistics through a computer, he calculated that if the Fed held M1-B growth at an annual rate of zero to 3 percent (which is its recent growth range) , the inflation rate could be halved in one year, and down nearly four-fifths in two years. In other words, the inflation rate would be 2 percent or less after two years' time. That's a contrast to the 7.3 percent figure forecast by the administration for 1982.

Only time will tell which model is more accurate.

In the meantime, the economic news remains typical of a deepening recession - bad. Unemployment in October increased more than a half-million to 8.5 million. Moreover, the number of people on nonfarm payrolls dropped more than 200,000 during that month. Auto sales fell 24 percent during October from the year earlier figure. Major retailers reported worst monthly sales of the year.

Faced with these conditions, the Reagan administration itself cut its forecast of real growth after inflation to 2 percent or less next year, sharply lower than the 3.4 percent predicted several months ago.

''There will be really nothing good happening to the economy until mid-1982, '' says Dr. Eckstein. That's when a 10 percent cut in incomes taxes goes into effect. And, if the Fed relents a little, that's when a somewhat easier monetary policy now would enliven business activity.

of 5 stories this month > Get unlimited stories
You've read 5 of 5 free stories

Only $1 for your first month.

Get unlimited Monitor journalism.