ECONOMIST Sally Kleinman refers to the three "R's" - but they are not reading, writing, and arithmetic. They are "the rising risk of recession" in the United States.
The latest statistics have prompted a dramatic change in tone by many economic forecasters. Ms. Kleinman of Chemical Securities Inc. in New York, for example, holds that "the economy is simply going through a somewhat uncomfortable transition from unsustainably fast growth to a slower growth pace." But she admits this process has been "steeper and longer than we previously thought was possible."
Some other economists are more pessimistic. "Are we already in recession?," asks Tony Riley, research director at economic consulting firm A. Gary Shilling & Co. in Springfield, N.J. "We are getting dangerously close to a downward spiral."
Retail sales, he notes, rose only 0.2 percent last month. If consumers don't start spending more, inventories will build further, companies will lay off workers, and people will have less money to spend.
"The consumer is much more seriously on vacation than what we thought," says Robert Brusca, chief economist of Nikko Securities Co. International in New York. But he maintains that the economy is still growing.
DRI/McGraw-Hill, a Lexington, Mass., economic consulting firm, has cut its forecast for growth this year to an after-inflation 1.2 percent. "There is a real risk of a self-fulfilling prophecy of a genuine recession," write Roger Brinner and David Wyss, two DRI economists. This, they note, would put the momentum toward balancing the federal budget under pressure, leave the financial markets in confusion, weaken the dollar, and hurt stock and bond prices.
"We could be in a recession," says Paul Kasriel, an economist at Northern Trust Company in Chicago. "The Federal Reserve might want to back off a bit."
A growing number of economists are making that plea. The Economic Policy Institute's Council on Money and Financial Markets - academic and nonacademic monetary policy analysts - this week urged the Fed's policymaking body to lower short-term interest rates a full percentage point at its next meeting July 5-6. Indeed, this liberal group called the Fed's seven hikes in interest rates between February 1994 and February of this year "a needless and destructive error" that destabilized the domestic economy and prompted the Mexican peso crisis.
Mr. Kasriel terms the 3 percentage point increase in short-term rates in 13 months a "big" move, unmatched except during the "great inflations" of 1973-74 and 1979-81. In both cases, a recession occurred. Kasriel expects the Fed to lower interest rates by 0.75 percent by year's end.
In fact, he would like to see Germany, Japan, and the US coordinate a lowering of interest rates at the summit of the Group of Seven leading industrial democracies that began here yesterday.
Japan's economy is stalled, Kasriel notes, and the German economy shows some signs of slowing.
What concerns Lacy Hunt, chief economist of HSBC Securities Inc. in New York, is the slowest monetary growth in 25 years in the G-7 nations. In the US, the money supply - the fuel for the economy - has been stagnant for a year. In Germany, the "broad money supply" has fallen for the last four quarters. Japan, too, has a strict monetary regime. This pattern, Mr. Hunt says, "bodes poorly" for the future pace of economic activity in the G-7.
But there is much skepticism among economists that the G-7 leaders will be able to coordinate economic policy as they did in 1985 by taking simultaneous measures to encourage a drop in the foreign exchange rate of the US dollar.
Fed Chairman Alan Greenspan and other G-7 central bankers are "still fighting the last battle" - the one against inflation, Mr. Riley says. The current battle should be against "slow growth and deflation."
Mr. Brusca, voicing some doubts about G-7 summits, commented: "They are useful in the same way the little toe on my foot is. I don't know what it is useful for, but I wouldn't want anyone to cut it off."