Though US economy slows, Fed holds a strong hand

A chill wind is sending shivers through the American economy. And the whole world is turning apprehensive that the Reagan honeymoon is over, ending its agreeable stimulus for the global economy.

Let me try to separate fact from fear.

To begin with, the first year and a half of the United States recovery was a strong one - strong for Main Street, USA, but also unusually strong for the Pacific Basin, Europe, and the developing regions. But strength has turned recently to weakness. The second half of 1984 sees a real growth rate here of around 2 percent per annum, a fall from the first half's 81/2 percent growth rate.

Secondly, the growth in job opportunity, which turned so many Democratic voters toward the Reagan camp, ended last spring. If the President's second term begins with a recession - as only a minority of economic experts think to be likely - the unemployment rate will rise. If the present torpor (called a ''growth recession'' because the US economy in the last half of 1984 grew more slowly than population and productivity trends make our potential GNP growth) should continue into 1985, this will cause a rise in the unemployment rate.

Also, corporate profits are beginning to erode. This is not lost on the stock market where equity prices languish. The early autumn deceleration in production growth made me expect for the first time in this recovery a weakening of interest rates. And that is happening.

The dollar remains overstrong from the standpoint of competitiveness for American manufacturers. Much of our stimulus continues to leak abroad.

My earlier prediction that the Reagan electional victory will do little for America's colossal fiscal deficit is looking to be all too accurate. Treasury Secretary Donald Regan has, surprisingly, let his tax specialists put together a Democractic Party reform bill, one that splendidly reverses the thrust of first-term Reaganomics. The supply siders are livid. Conservatives are mobilizing their lobbying clout in opposition. Once it is explained to the President what his Treasury is proposing, he is sure to repudiate the program explicitly or tacitly. I hope I am wrong in this, but I think it a 5-to-1 probability.

Finally, the winds of inflation remain quiescent.

On the evidence, I'd consider an American recession unlikely in 1985. Our hidden card is the Federal Reserve, which in my opinion has both the will and the ability to offset any natural weakness in the private economy.

As a result I am hopeful concerning the 1985 world outlook - even if not quite so sanguine as estimates prepared by the Wharton World Economic Outlook during the autumn. These show US gross national product (GNP) and selected world gross domestic product (GDP) growth rates (correcting for inflation):

* The US goes from a 3.7 percent GNP in 1983 to 6.7 percent in '84. Wharton projects a 3.5 percent GNP in '85 and 3.1 percent in '86.

* European GDP averages 1.2 percent in '83 and 2.3 percent in '84. Wharton projects a 2.1 percent European GDP in '85 and 1.1 percent in '86.

* Japan shows a 2.9 GDP percent in '83 and 5.4 percent in '84. Wharton forecasts a 3.8 percent GDP for Japan in '85 and 2.5 percent in '86.

* Developing countries average GDP rates of 0.2 percent in '83 and 2.7 percent in '84. Their GDPs are estimated to be averaging 3.5 percent in 1985 and 3.1 percent in '86.

Why not figure that weakness today means outright recession some months from now?

First, sampling surveys show consumers still are confident.

Second, real interest rates have already fallen significantly since mid-1984. If auto sales and new orders weaken further, we can expect interest rates to fall still more. My reading of the housing market is that reductions in mortgage rates can still coax out some extra housing starts.

Third and most important, the last several American recessions had marked clearly on their bottoms: MADE IN WASHINGTON. Those recessions were countenanced and contrived in order to fight against accelerating inflation.

At present, there is no double-digit price inflation in America. With OPEC still weak and plagued by supply surpluses, there is no credible resurgence of such inflation on the intermediate-run horizon.

Therefore, the Federal Reserve should have the will to lean against any recessionary winds that may blow up. Equally important, this time it faces an economy that still has the strength to be able to benefit in enhanced output from engineered money stimulus.

Wall Street in mid-1982 welcomed Fed chairman Paul Volcker's shift toward monetary ease. A similar campaign in early 1985 by the Federal Reserve to grapple with any apparent weakening of the economy, I suspect, would also meet with money market approval and reinforcement - rather than with fear that the Fed has turned soft on the issue of inflation containment.

A strong bond market will help the ailing stock market. It will bring down mortgage rates, and that will help housing to revive. Life can be brought back to the mid-1980s expansion. The economy is not yet in deep trouble.

In sum, Reaganomics did not produce the earlier strong recovery. The disillusionment with Ronald Reagan's policies that has already begun is not sufficient to weaken the US and world economy.

What is good advice for policymakers in America also applies abroad. The governments in Japan and Europe do have the elbow room to resist any tendencies toward slumps that might occur in 1985.

Governments abroad should exercise their latent powers. It is not prudent policy to depend always on the US for stimulus.

It is ironic that a conservative American president blundered into massive Keynesian expansionism. But economics is too serious a business to be left exclusively to statesmen and ideologues.

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