A `Delicate Point' For US Economy

WAll STREET economist Sam Nakagama says the United States economy has now reached a ``delicate point.'' John Godfrey, chief economist for Barnett Banks Inc., Jacksonville, Fla., says, ``It would be easy for this thing to tip into a recession.'' What has both concerned is the Federal Reserve System's tight money policy and the possibility of a credit crunch spreading from the construction industry into other areas of the economy.

All this has a feeling of d'eja vu. The Fed imposed a tight money policy from December 1988 to June 1989. In that period, one measure of the nation's money supply known as M2, which includes bank checking accounts, currency, and some savings, grew at a meager 2 percent annual rate.

Some economists expected this to produce a recession. It almost did. The nation's output grew at not much over a 1 percent annual rate in the last quarter of 1989 and the first quarter of this year.

However, the Fed reversed gears a year ago and M2 grew at almost an 8 percent annual rate through last December. Though there is a lag between a change in monetary policy and its impact on output, the Fed probably acted just in time to avoid a slump.

Since December, growth in the money supply has again become skimpy. The annual rate for M2 was 3.9 percent in the latest three months. ``It means the Fed is not doing much when the economy is showing no signs of a pickup,'' says Mr. Godfrey.

Indeed, all key measures of the monetary aggregates showed marked declines in May. That, says Mr. Nakagama, ``seems to suggest that monetary policy is too constrictive.''

He adds: ``Although special factors - including the fallout effects from the S&L bailout - may be behind the sudden slump in money growth, the significance of the slowdown should not be underrated.''

Many have feared that the savings and loan crisis, prompting regulators to become tougher on both the thrifts and the commercial banks, could prompt a credit crunch.

Godfrey asks whether the nation could face a squeeze of the type that occurred in the 1960s and 1970s when money was simply not available, not just a matter of being expensive (high interest rates). In those days, so-called Regulation Q limited the interest rates financial institutions could pay on deposits. When market rates went above that, thrifts and banks saw a drain on their funds and they could make no new loans. In the present situation, the concern is that banks will restrain loans out of fear of regulators and further real estate losses in particular.

So far Godfrey figures the economy will ``muddle through,'' though not in a grand style. Growth in output will be low.

Signs of softness in the economy have been multiplying. Private nonfarm payrolls have contracted by 105,000 since February. Retail sales were off a sharp 0.7 percent in May after falling 0.9 percent in April and 0.4 percent in March. That's the first time this important gauge of economic activity has dropped three months running since the last recession.

Sales of homes and cars are in a slump. More providers of house mortgages demand a 20 percent downpayment, often eliminating first-time homebuyers from the market.

Auto sales, says Nakagama, are depressed because banks and finance companies have been cutting back on the extension of car loans with maturities of five years or more. The lenders are trying to reduce the incidence of default among their borrowers.

With the slowdown has come considerable progress in fighting inflation. Over the past three months, consumer prices have climbed at an annual rate of 3.2 percent. That's a major reduction from the 8.5 percent rate recorded in the January-March period.

Nakagama has marked down his forecast for the gross national product. He's now anticipating growth in the second quarter ending this month at an annual rate of 1.1 percent, 1.2 percent in the third, and 1.7 percent in the fourth. He's assuming the Fed will ease monetary policy soon.

Fed Chairman Alan Greenspan and his colleagues at the Fed meet again July 2-3 in Washington to consider monetary policy. The markets will be watching closely to see if they do decide to loosen the money spigots.

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