Rubber-Legged Economy May Fall by 1996 Election

Weak dollar, higher interest rates could crimp Clinton's reelection

THE United States economy may be heading for a slowdown -- and perhaps recession -- in time for the 1996 election.

That is the consensus among a number of economists, who point to an array of developments:

* The peso crisis in Mexico, which killed strong export opportunities for many US manufacturers.

* Higher interest rates, which are shrinking both the housing market and consumer demand for cars, microwaves, and other goods bought on credit.

* The weak dollar, which is boosting the chances of another interest-rate hike in order to make the greenback more attractive to foreign investors.

* Failure to pass the balanced-budget amendment, which chilled world confidence in Washington's long-term fiscal management.

''Nothing is overwhelming, but it's all pointing in the same direction,'' says Murray Weidenbaum, the former top economic adviser to President Reagan, who now directs Washington University's Center for the Study of American Business in St. Louis.

''The question is, how far and how fast is the slowdown.'' Mr. Weidenbaum believes that ''in late 1995, sliding into 1996, we'll be skirting the edge of recession. We might well fall in.''

Much of what happens with the economy, of course, will pivot on what the Federal Reserve does. Fed chairman Alan Greenspan continues to worry about inflation -- now running at a 3 percent annual rate.

Fed watchers await next Tuesday's meeting between Mr. Greenspan and his fellow policymakers, who have notched up interest rates seven times -- three percentage points -- in the past year to fend off inflation.

Many economists say a further increase in the future could push the country into recession. Already, higher interest rates have made it tougher for borrowers to pay back loans -- an important development given that consumers account for two- thirds of the economy.

'Warning Light'

With credit relatively easy to get during the past year, American indebtedness has surged for everything from television sets to college educations. Payment delinquencies on those purchases rose during the last three months of 1994, after 10 quarters of decline, according to the American Bankers Association.

ABA's chief economist, James Chessen, sees this development as a ''warning light in a car. You want to check it out to see if there's a problem.''

More than likely, there is trouble ahead, he says, pointing to the growth in credit- card use and an expected tougher credit policy by banks.

''The environment is riskier, and every bank is looking to tighten credit.'' That, coupled with the lagging effect of the Fed's higher interest rates, he says, ''raises the probability of a recession in 1996.''

For the rest of this year, businesses will likely continue buying equipment to add to production capacity, but the consumer slowdown and higher interest rates will soon trip it up, Chessen says.

Some Wall Street analysts worry that this could interrupt the general rise in the stock market -- now entering its 48th month of bullishness.

Other analysts aren't so gloomy. Tom Carpenter, chief economist at ASB Capital Management, an investment firm here, says the markets will remain buoyant and the economy will probably avoid recession.

He points to strong fundamentals: The banking system is rehabilitated, commercial real estate has bounced back, US companies are more competitive, and industries and towns have seen the worst of the defense cuts.

But Mr. Carpenter says some slowdown is necessary to reach the ideal condition -- a marginal inflation rate that bolsters the standard of living by making houses, cars, education, and even government borrowing more affordable.

''Once we get away from high inflation, we create an economic engine that's a marathon runner,'' he says. The Fed is already pursuing a ''stamina'' strategy that is slowing growth and drawing out the economic recovery, says New York-based economist Audrey Freedman.

But, she contends, Greenspan's real interest is to keep rates high enough to compete with Germany and other countries where higher rates of return are drawing in investment capital that the US sorely needs.

As a debtor country, she adds, ''We're so deeply dependent on foreign capital, we can't afford for foreign investors to find us an unattractive investment.''

Political impact

How the economy proceeds will be pivotal politically in 1996. Slowdown or not, Mr. Clinton can boast about the 6 million new jobs during his tenure, an uptick in exports, and a stronger commercial sector, asserts an administration official.

Mr. Weidenbaum disagrees. ''The Clinton administration doesn't seem to have benefited from a strong economy,'' he says. ''These folks gripe that they're not getting credit, but they didn't give George Bush credit for the upturn that began'' well before Clinton took office.

If the economy slips into recession, it won't help the president's reelection chances, analysts agree.

But there are risks in a sluggish economy for the Republicans, too.

''If a recession comes, it will be much harder to make the cuts in safety-net programs to get the kind of savings needed to offer the tax cuts,'' says political analyst Kevin Phillips.

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