President Carter is facing some good news and some bad news in this year's economic outlook:
The good news is that as analysts now figure it, the economy won't be falling into a recession as quickly as the forecasters once thought. The odds are now that the downturn won't come until sometime in the fall. A slump by spring or even mid-year now seems unlikely.
The bad news for Carter is that when the recession does come, it's likely to be a bit deeper than most of the experts had been predicting -- and it's apt to spill over well into 1980, leaving the unemployment rate high at the start of next year's presidential election campaign.
That means Carter is less lekely to be able to pull off the trick some of his political advisers envisioned -- that is, to get the recession "out of the way and done with" before the 1980 campaign begins. And if the recession rpoves deeper than expected as wekk. Carter's political troubles will increase.
The changes from the earlier forecasts stem basically from two factors:
First, the economic statistics for the fourth quarter of 1978 have been coming in far more robust than expected, suggesting there probably will be enough momentum to carry the economy through the first six months of this year. In particular, consumer spending has continued relatively high.
At the same time, the steeper-than-predicted oil price increase announced by the petroleum exporters' cartel last month is considered likely to add to inflation and make businessmen more wary of investing. Although the recession still is apt to be mild, the risks now are greater that it could deepen.
"There's no question the current outlook reduces the chances for a soft landing," says Arthur M. Okun, former Johnson economic adviser who earlier had been more ebullient about prospects for 1979. "There's no sign of a recession now," Okun says. "But it's hard to see how we can escape one."
Alan Greenspan, President Ford's chief economist, agrees the later-than-expected recession could leave Carter "in rather difficult shape" for 1980. "Rather than look benevolently on the numbers that are coming out, Carter ought to be apprehensive," Greenspan says. Ford lost in just such a box.
Here's where most of the private forecasts come out:
OUTPUT: The economy is likely to grow betrween 1 and 2.5 per cent this year -- a forecast that implies continued moderate increase during the first half of the year and small to moderate declines in the final two quarters -- enough to qualify technically as a recession, and perhaps even more.
Most economists still expect consumer spending to taper off before mid-year, as buyers realize they're too heavily in debt. Housing is apt to slow from its present pace. And business investment will remain flat. On the good side, the economy still is in balance, with no major distortions.
INFLATION: Although the Carter administration still is predicting that inflation will slow to just above 7 per cent -- from about 8.5 per cent in 1978 -- most private economists are forecasting that prices will continue at an 8 per cent pace or so, even with the new guidelines program.
Besides the larger-that-expected oilprice hike to contend with, there's also the Federal Reserve Board's latest rise in interest rates, and a spate of government-induced cost-increases, such as the higher minimum wage and Social Security payroll tax hikes.
UNEMPLOYMENT: With the economy's growth rate slowing, it's almost certain the jobless rate will begin rising -- perhaps to 7 per cent by yearend, from the present 6 per cent level, and possibly to 7.5 per cent in 1980 before finally edging down.
Although the high jobless rate isn't likely to hurt as much as in previous years -- because workers are better protected by unemployment insurance and private jobless benefits -- many low-skilled and "marginal" workers will be in bad straits. And that could spell trouble for Carter in 1980.
(These forecasts already include the likely impact of such outside forces as the increase in crude-oil prices announced last month for 1979 by the Organization of Petroleum Exporting Countries, and the effect of the 1978 tax bill. The OPEC hike sounded big, but wasn't much larger than expected.)
There's still some debate about the depth, if not the lieklihood, of the coming recession. The Carter administration, along with a minority of private economists, still is predicting there won't be any downturn -- just sluggish growth ranging between 2.5 and 3 per cent this year.
Although more realistic administration economic advisers gradually have been trimming back their forecasts, Carter himself is said to be convinced he can avert a real downturn. He told a group of businessmen recently the economy will fall into a recession only if Americans "talk ourselves into one."
But that kind of optimism increasingly is being abandoned by non-government economists, most of whom seem convinced a recession is virtually inevitable and now are arguing only about its timing and depth.
Otto Eckstein, another former Johnson economic adviser who now heads Data Resources, Inc., an economic forecasting firm, has just altered his 1979 forecast to push the recession into the third and fourth quarters, with a sharp drop in output in the final three months of the year.
Eckstein's figures, however, include a prediction of a 75-day-long auto strike against General Motors during the fall. While the inevitable production loss stemming from the strike almost certainly would be made up in the first quarter of 1980, the shutdown would worsen the late 1979 performance.
The risk is whether the sluggishness deepens into a significant economic slump. Right now, analysts don't see that as liekly, if only because the economy still is too well-balanced. The inventory pile-up that preceded the 1974-75 recession, for example, just isn't in the cards.
To many economists, the biggest uncertainties are in the two big areas over which Carter doesn't have any real control -- the money and credit policies set by the independent Federal Reserve Board, and the fate of the dollar in the hands of foreign currency traders.
Thanks to the new six-month money market certificates, the economy has been insulated from the recent tightening of monetary policy. The Fed's steady upward push in interest rates has only begun to cut into the housing boom, and signs are new starts still will come in this year at 1.7 million or so.
But the fact is, analysts still din't know for sure how the economy will react if interestrates go significantly higher. The prime rate is expected to reach 13 percent or so by late spring. If economic activity slows sharply in response, it could quickly exacerbate the recession.
The dollar problem is even more uncertain. With the trade balance improving and the administration's dollar-rescue plan in place, most analysts had expected the dollar to remain stable through most of the year, edging up some when the U.S. enters its recession. But now some say it could slip further.
For all the talk about continuing pockers of high unemployment, a good many analysts are convinced the economy already is approaching a "demand-pull" phase of the cycle, where economic overheating is likely to pull prices up even more rapidly. A mid recession could help stave off that situation.
It's too early to tell which prediction will prove correct for 1979 -- the private forecasters' warning of a recession or administration's more optimistic scenario. But, to President Carter, at least, the race may prove more than academic. It could mean the 1980 election as well.