As President-elect Ronald Reagan began naming his economic advisers this week, the economic news and outlook could hardly have been worse.
Major banks lifted their prime lending rate to 20 percent, matching last April's record level, amid some signs and widespread expectations the economy soon will turn down again.
Market analysts warned that interest rates could keep climbing until a slumping economy cuts demand for bank loans, especially by business and industry.
Largely because of the squeeze on credit, the stock market has fallen 9 percent in the nine trading days since Nov. 28, a huge paper loss of $110 billion.
Similarly, mortgage lending commitments are drying up around the country, and those still available are at rates unaffordable by most would-be buyers. And the high interest rates also are being blamed for the fact auto sales were falling sharply in late November. Most U.S. automakers have responded by announcing early plant closings and layoffs that will last until early January. In the final days of the month, truck sales, even more sensitive to interest rates than car sales, dropped to their lowest level in years.
Even though interest rates have reached the same level as last spring, most forecasters and government policy makers do not expect the economy to decline nearly as precipitously as it did in the second quarter of this year when output fell at nearly a 10 percent annual rate.
Most of that drop was concentrated in the auto and housing industries. Since neither has recovered fully since the spring, they probably will fall less this time around, the forecasters expect.
More importantly, no one is likely to impose credit controls again, a move that many economists blame for both the sharpness of the second-quarter decline and the unexpectedly quick recovery when they were lifted.
In any event, there is clearly less of a sense of panic in financial markets this time around, perhaps, as a Carter administration economist put it, "because they have lived through it once before."
Donald Regan, named yesterday as Treasury Secretary in the Reagan administration, promised a "comprehensive" attack on inflation that would involve more than just restrictive Federal Reserve policies. However, he noted, "it's the only game in town at this current moment."
Whatever interest-rate levels may be doing to auto sales, to say nothing of sales of new and existing homes, they so far have not discouraged business borrowing. Commercial and industrial loans in the week ended Nov. 26 were up a huge $2 billion at the large banks that report such information weekly to the Federal Reserve. Such loans have been rising at more than an 18 percent rate for the last three months.
It is a collision between this demand for funds and the attempt by the Federal Reserve to slow the growth of credit as part of its anti-inflation stance that has boosted interest rates so sharply.
The overall picture "is typical of the late stage of a recovery -- early phase of a recession," economist Alan Greenspan said. "In that sense, the summer improvement in the economy may have reacted as a mini-recovery, with recession characteristics reemerging now."
Greenspan said that, according to information on employment and production, the recovery clearly continued in November "though at a somewhat slower pace than in prior months. Unfortunately, these two indicators appear to be out of step with the rest of the economy, suggesting that inventory accumulation may be occurring."
In other words, sales of goods are slowing faster than production, so that unwanted stocks are building up in the nation's factories as well as wholesaler and retailer shelves. Reflecting this, new orders for goods dropped sharply at many firms in the last part of November, Greenspan said.
But in the short run, many businesses are forced to borrow more money from banks to allow them to carry these added inventories which they did not want in the first place. And they are forced to borrow even if the prime rate is at a record level of 20 percent.
Another analyst, Allen Sinai of Data Resources Inc., said the Federal Reserve "clearly . . . is now creating a crunch in order to break the rapid expansion in money and credit and to deal with expectations of a severe inflation to come next year. The recession risks are going to be taken in order to bring money growth as close to Fed targets as possible by year-end."
In one sense, taking office with interest rates at a peak and the economy sliding downward again gives a new president nothing but opportunities. However, inflation will not be coming down and may not even necessarily be at a peak. The challenge for the new administration is how to deal with any of the problem areas without making the others worse.