Forecast for US: slow growth in '88
New York — Although the economy faces an uphill climb next year, it continues to move ahead with enough strength to please the Republicans and business community. Since the October stock market plunge, impressions of the economy have changed, but the economy itself has not.
Before the Oct. 19 crash, the word recession was a historical term last used to describe the early 1980s. After Black Monday, ``Perceptions changed dramatically,'' says Mitchell Held, chief financial economist for Smith Barney, Harris Upham & Co.
But a snapshot of the economy today finds few signs of a recession.
``There seems to be a division between Wall Street and Main Street,'' says Sears economist Thomas Swanstrom.
Industrial production over the past two months is up a healthy 1.2 percent and orders for durable goods are up 1.8 percent. Auto sales have perked up in recent weeks and personal income is still growing. Only retail sales are weak.
``Things look pretty good,'' says David Wyss, chief financial economist for DRI-McGraw Hill, ``It does not look like a recession is inevitable.''
Forecasts are not particularly gloomy. The 51 economists surveyed by the Blue Chip Economic Indicators in early December predicted the gross national product would rise by 2 percent next year. Last week, the White House lowered its growth estimate for 1988, but said it still expects an optimistic 2.4 percent real growth rate.
By way of contrast, the economy this year is expected to grow at about a 3.6 percent annual rate, making 1987 the fifth consecutive year of growth.
It will not be surprising to see economists change their forecasts through the year to reflect the shadow cast by the market crash. Oct. 19, the day the Dow Jones industrial average plummeted a record 508 points, ``will be remembered as the time reality caught up with dreams,'' says Monte Gordon, research director for the Dreyfus Corporation.
As Mr. Gordon notes, the problems of the twin budget and trade deficits, uncertainty over the flow of funds to finance the deficit, and questions about monetary policy converged at a time when many commentators were comparing 1987 to 1929. ``There was the fear of the past repeating itself,'' Gordon says.
In some ways the economy moved into uncharted waters in 1987.
The trade deficit ballooned to a record $170 billion. The US became a net debtor nation, having more debts than income. In October, when central banks stopped supporting the dollar, it too became a casualty, falling 10 percent to post-World War II lows.
Economists expect continued downward pressure on the dollar, especially since it is unlikely the Federal Reserve Board will raise interest rates to help support the greenback. And even though the US balance of trade should begin to improve, there are likely to be plenty of dollars around the world.
Next year will be another transition period for the economy. Basic industries - such as chemicals, steel, forest products, aluminum, and copper - will benefit from improved export markets and reduced foreign competition. ``I have to think US business is competitive at these exchange rates,'' says Clayton Yeutter, US trade representative.
Consumer businesses may not be as healthy as export-oriented firms. After the stock market crash consumer confidence dropped, notes Brian Fabbri, an economist with Thomson McKinnon Securities. ``This often presages major changes,'' Mr. Fabbri says.
The auto industry, for example, is now expecting a slowdown. ``We could see some slowdown in the rate of production,'' says David Munro, senior forecaster for General Motors.
Housing, which makes up 10 percent of the economy, will likely come down next year as well. Commercial activity is already slowing because of high vacancy rates in some cities. Federal construction projects, however, are strong, as are factory expansions. Demand for cement products, which is the basic ingredient in construction, should be flat to down 5 percent, predicts Kenneth Simmons, a Bucks County, Pa., consultant.
The outlook for many consumer businesses is not totally bleak either. Mr. Swanstrom of Sears says consumer wallets will be stuffed with more cash because many people were overwithheld on their income taxes and will receive refunds. In addition, the final round of tax cuts kicks in Jan. 1. Unemployment is expected to remain relatively low, and wages are rising.
As a result of these factors, Swanstrom says, ``I expect a good but not a spectacular year.''
Higher prices for imported goods will start to cause some inflationary pressure. At Sears, Swanstrom notes that apparel prices rose 11.8 percent in the third quarter.
Even with import prices rising, inflationary pressure should remain moderate. In its forecast of 1988, the White House says it expects inflation, as measured by the consumer price index, to rise by 4.3 percent next year. One reason economists can be more optimistic is the break in oil prices late this year, which sent the price of crude oil below $16 per barrel.
All of these factors mean Federal Reserve Board policy will be difficult. The Fed must supply the economy with enough money to grow, while keeping interest rates high enough to support the dollar. If the first half of 1988 remains strong, says Mr. Held of Smith Barney, the Fed could raise interest rates. Beryl Sprinkel, chairman of the President's Council of Economic Advisers, is warning against such action. If Fed chairman Alan Greenspan can guide the economy through the year, he should be Time's Man of the Year for 1988.
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