Economists See Growth Slowing As US Rates Rise

Federal Reserve is expected to tap monetary brakes again to slow down speeding economy

ECONOMISTS expect the Federal Reserve to shove interest rates onto the ''up'' escalator Wednesday. They aren't so sure, however, if this is the top floor for rates, or if they will go higher again in a month.

''The Fed can't be seen as inactive,'' says Lyle Gramley, a former Fed governor and a consulting economist for Mortgage Bankers Association in Washington.

Most forecasters anticipate a rise in short-term rates of 0.5 percent this week. This increase, like the other six interest-rate hikes since last February, is designed to slow down economic activity.

On Friday, the government reported the economy was in high gear in the last three months of 1994. The Gross Domestic Product, the output of the nation's goods and services, grew at a real 4.5 percent rate, up from 4 percent in the third quarter.

The GDP numbers indicated that a significant part of the nation's output ended up in warehouses or on retailers' shelves as inventory. ''That rate of inventory investment cannot continue indefinitely,'' warns Mr. Gramley.

The rise in inventories prompted some economists to predict the economy had finally started to respond to prior interest-rate increases. ''There are signs the economy is starting to be not as strong as anticipated,'' says A. Gary Shilling, who runs his own economic consulting firm in Springfield, N.J.

Mr. Shilling points to a slowing in sales of consumer durables, such as automobile sales. ''Consumer durables usually peak about one to seven quarters ahead of the economy and it looks like a peaking out,'' he predicts.

Last week, Fed chairman, Alan Greenspan, in testimony before Congress, indicated that he too saw signs of a slowing economy. Mr. Greenspan also hinted at a rate increase since he also said he was distressed by some signs of inflation.

Gary Shoesmith, a professor at Wake Forest University's Babcock School of Management in North Carolina, warns against interpreting the inventory statistics as a forerunner of a downturn. ''Inventory is at historic lows and we are simply restocking,'' he explains. He predicts companies will continue to build inventory over the next two quarters, ''keeping the GDP persistently strong for the first half of the year.''

But Susan Jacobs, who runs her own consulting firm in New Jersey, says the auto industry now has ''excessive'' inventories in subcompacts and minivans. Nonetheless, she is not convinced that the inventory rise indicates car sales have peaked. ''The companies may have just offered less incentives,'' she explains.

Economists predict that at some point this year consumer spending will start to tail off. Banks are increasing interest-rate payments for adjustable-rate mortgages, which represent about 25 percent of the nation's mortgages.

If the mortgages are reset two full percentage points higher, the monthly payment on the median $130,000 mortgage will rise by $190 per month. ''That will result in a considerable reduction in discretionary income as we go through the year,'' says Lacy Hunt, chief economist at HSBC Securities Inc., New York.

The potential reduction in consumer income has prompted most economists to forecast the US economy will be considerably slower by next year. The economists surveyed in Eggert's Blue Chip Consensus in Sedona, Ariz. predict a 2.2 percent real growth rate in 1996.

''My guess is that for next year, economists will be tending to pull in their horns a bit,'' says Mr. Eggert, who sees the 1996 economy growing at a 1.9 percent real rate.

There are, however, a few economists who are predicting a recession or sharp downturn. Mr. Shilling, for example, believes the US economy will be in a recession by the third quarter. ''I've been through enough recessions to know you can go from strength to recession so fast that you need to ask them to rewind the tape so you can see it again,'' he quips.

With short-term interest rates rising, economist Robert Brusca of Nikko Securities International Inc. predicts a shallow recession of less than a year in 1996. ''It will allow the Fed to turn around and reduce interest rates quickly,'' he says.

Brusca believes the Fed, in its eagerness to squash inflation, will go too far and miss the chance for a ''soft landing'' without a recession. ''I don't believe in soft landings and I don't believe in the tooth fairy,'' he states.

Most economists, though, are not in the recession camp. ''The economy does not stop on the dime and there is a lot of momentum,'' says Peter D'Antonio, senior economist at Citibank.

Mr. D'Antonio points to strong domestic demand, good employment and income growth, and high consumer confidence. ''Everything is in place,'' he states. In fact, D'Antonio believes the Fed needs to lift interest rates by 1.5 percentage points through midyear.

The one possibility of danger, warns Gramley, is a further deterioration in the Mexican peso and the failure of Congress to approve a $40 billion loan guarantee. If Congress does not pass the Mexican package, he figures exports to Mexico could tumble by as much as $20 billion, a 40 percent decline.

You've read  of  free articles. Subscribe to continue.
QR Code to Economists See Growth Slowing As US Rates Rise
Read this article in
QR Code to Subscription page
Start your subscription today