Dispelling US economic clouds will not prove easy

Stagnant economic air is creating thunderclouds for policymakers. And no matter what they do, it seems, it will be hard to avoid getting wet. Because of budget constraints, the government cannot spend itself back to blue skies.

Many economic forecasters also doubt that the Federal Reserve Board, which met this week, can do much, either -- even though it is under pressure to drop interest rates further. Yesterday, White House chief of staff Donald Regan called for another cut in the discount rate, the rate the Fed charges its member banks.

The largest black cloud on the horizon is the swelling budget deficit. As the economy lags, it grows. Gross national product grew by only 0.6 percent in the second quarter. And according to the latest estimate from the Congressional Budget Office and the White House Office of Management and Budget, the budget shortfall for 1987 will be $19.4 billion more than previously estimated. Thus, under the Gramm-Rudman bill, Congress must slice another $9.2 billion from next year's budget to avoid automatic cuts mandated by the bill.

But many economists think this is the wrong time to try to cut back government spending. ``If we wanted to pick the worst time to bring the deficit down, we picked it,'' says Norman Robertson, chief economist at Mellon Bank. Reducing the budget deficit sucks money out of the economy. During a time of low economic growth the deficit keeps growing as tax revenues shrink. ``Thus, we keep cutting,'' says Mr. Robertson, ``which only makes things worse.''

Should the stagnation continue this quarter, the government could stop cutting the budget. Under the Gramm-Rudman bill, if there are two quarters where growth is only 1 percent per quarter, the deficit reduction process is stopped. Lawrence Chimerine of Chase Econometrics worries, however, that you ``still have a problem if the economy is growing at slightly above 1 percent. That's pretty weak.''

Thus, there is a lot of pressure on the Federal Reserve Board to lower interest rates once again. But even this may not stimulate the economy. Lowering interest rates, says Mr. Chimerine, is ``like trying to push a string.''

Like many other economists, he maintains that lowering rates will have only a marginal effect. ``People are reluctant to borrow more; they are already stretched pretty thin,'' he says.

This is borne out by Commerce Department numbers, which show consumer spending already at a high level -- growing by 6.5 percent in the second quarter.

Wall Street is hoping the Fed does cut rates. There are rumors the Fed might act as early as tomorrow, before the Treasury offering of $8 billion in new bonds at auction next week.

``I'm getting nervous about what's happening down in Washington,'' says David Jones of Aubrey G. Lanston, a bond house. ``We need to return some certainty to the economy.''

Greg A. Smith, president of the market management group of Prudential-Bache Securities, worries that the Fed's ``gradualism'' policy of lowering interest rates is ``too little, too late.'' He argues that the economy needs a drop in the discount rate of one or even two percentage points. Such a sharp drop, he says, ``. . . would scare the living daylights out of the bond market, and it could mean a precipitous drop in the dollar; but we think the good news is that in return for that risk, there is a good chance the economy would snap back. . . .'' A dropping dollar could help lift sagging sales of US exports.

One major uncertainty is how much companies will be spending on plant and equipment. With the tax bill finally completed, economists hope business will pick up their capital spending. However, many companies building new plants are going outside the United States because of the more abundant and cheaper labor supply. ``We have a structural problem,'' says Mr. Jones.

All of these dark clouds leave policymakers with few options. ``We've pretty much used up our ammo,'' says Robertson. But, like other economists, he still does not see the stagnation turning into a recession. ``I give it only a 30 percent probability,'' he says. ``We could just have a period of little growth.''