Economy looks good for Republicans in '84, but may lose some luster in '85
Washington — The economy has dropped a number of attractive presents under President Reagan's 1983 Christmas tree, including healthy economic growth, falling unemployment, and fairly well-controlled inflation.
Forecasters say the economy will continue to treat Mr. Reagan well in 1984 - working to his benefit if he runs for reelection - although the pace of growth is expected to slow and the rate of inflation edge upward as the election year progresses. But the postelection economic outlook is less cheery.
''Nineteen eighty-four will be a very good year,'' says Robert Gough, senior vice-president of Data Resources Inc., a forecasting firm. ''The momentum in the economy is too strong to falter in the near term.''
However, ''we see problems in 1985 and 1986,'' as government and private credit demands collide, notes Kurt Karl, director of long-term forecasting for Wharton Econometric Forecasting Associates.
As a recovery progresses, growth has a natural tendency to slow. And some Reagan administration officials worry that the Federal Reserve Board's recent tight control of the money supply could rob the economy of additional momentum as election day approaches.
''The Fed wants to cool the economy before it overheats,'' Treasury Secretary Donald T. Regan told reporters Monday. My concern at the current moment is that they don't overdo it.''
''Things are going to be very much calmed from where they are now'' by election day 1984, says David Cross, senior economist at Chase Econometrics, another forecasting firm. Despite less robust growth, ''we won't be in a recession,'' and unemployment will be below 8 percent by November, he says. ''All things considered, it could be a very attractive climate for the President to be reelected.''
The 45 top economists surveyed by Blue Chip Economic Indicators, a newsletter published in Sedona, Ariz., predict the economy will grow 5.4 percent after adjustment for inflation in 1984 while consumer prices will climb 5.0 percent. Unemployment for the year is expected to average 8.2 percent.
But the outlook for 1985 and '86 will present the White House with major economic challenges, forecasters say. The period will be characterized by ''shrinking output growth, more rapid inflation, and rising interest rates,'' according to a report from Lawrence Kudlow & Associates, a Washington-based forecasting firm.
A key problem is that huge federal budget deficits may collide in the credit markets with increasing corporate demand for funds, pushing up interest rates and putting pressure on prices.
''The basic assumption is that there will be no action (on) budgetary control in 1984,'' either to cut spending or raise taxes, notes Kris P. Denton, research director at Kudlow & Associates. On Wednesday, President Reagan ruled out any deficit-trimming tax increase in 1984.
Government deficits and corporate borrowing have avoided a major collision so far because companies have been able to finance spending out of strong profits.
By the end of 1984, however, many will be looking at costly investments in new plants.
''No way can they pay for the plants out of earnings,'' says Donald Ratajczak , director of the economic forecasting project at Georgia State University.
The competition for funds between the government and private sectors in late 1984 and 1985 could push up interest rates, dampening interest-rate sensitive industries like housing, and automobiles. As a result, progress in reducing unemployment could grind to a virtual halt.
The current consensus forecast, as reported by the Blue Chip newsletter, holds that in 1985 real economic growth will slow to 3.5 percent while consumer prices move ahead 5.9 percent. By the end of 1985, if there is no action to trim the deficit, ''we could see real growth disappear,'' Mr. Cross says.
For example, some forecasters, including the Wharton firm, expect high interest rates to cause a downturn in business investment in 1986. Cross is more pessimistic than the consensus forecast for 1986 of 2.4 percent and says inflation-adjusted economic growth in '86 might be only 0.6 percent. As growth sags, ''We could see recession taking hold again'' in 1986 if current policies are maintained, he says.
Long-range predictions ''are not exceedingly accurate,'' Wharton's Mr. Karl warns. ''But we can get a general idea of what the economy will be like.