As President Reagan prepares to address a joint session of Congress tonight to argue for passage of his budget and tax cuts, the economy keeps behaving in unexpected and unpredictable ways.
The economy has turned out to be stronger in each of the last three quarters than most economists forecast, and growth has exceeded expectations by steadily widening margins. The preliminary estimate of growth in gross national product, adjusted for inflaction, for the first three months of 1981 was pegged at a seasonally adjusted annual rate of 6 1/2 percent, the strongest three-month GNP gain since the second quarter of 1978.
Only a few weeks ago, many forecasters still were predicting a significant drop in economic activity in the current quarter as a result of high interest rates and slow growth in personal incomes. Now forecasts more commonly include a very small decline at worst and more likely a small further increase in output.
Nevertheless, economists both in and out of the administration believe that the three-quarter string of ever faster growth rates has come to an end. Somewhat more bearish than most at the moment, Treasury Secretary Donald T. Regan told reporters yesterday that the economy was weaker in March than in January, suggesting that it "is coursing downward." Before year's end, he added, there could be one or two very weak quarters, he added.
Alan Greenspan of Townsend-Greenspan & Co. agrees the economy hit a peak of sorts in January that was well above its average level for the fourth quarter, and that since then it has been "basically flat or sluggish." But because the economy remained on that plateau for the rest of the first quarter, on a seasonally adjusted basis, it surpassed the preceeding three months by 6 1/2 percent.
Greenspan expects this quarter's real output to be about at the same level as the first quarter's or very slightly higher. He sees "no real evident weakness" in labor markets, with only 386,000 initial claims for unemployment insurance in the week ended April 18, the lowest weekly figure this year.
Some other statistics, such as those for industrial production, show much more weakness than do the comparable portions of the GNP figures, Greenspan notes. Such discrepancies develop when the economy exhibits no underlying trend either up or down.
Economist George Perry of the Brookings Institution, like most forecasters, is uncertain just what surprise the economy will spring next on the unwary. "You have to cross your fingers that you will not be 180 degrees off next quarter," he said.
At the moment, the economy again looks stronger to Perry that it did. "When we got the fourth-quarter number [with real GNP rising at a 3.8 percent annual rate], I said that," he notes. "Now I'm wondering if . . when we get a reading on the second quarter, I'll say it again." But he still thinks there is a weaker economy ahead.
Perry is certain housing construction will be lower this quarter because high mortgage interest rates have slowed housing starts greatly. Auto sales should be lower, too, because the rebate programs of the U.S. manufacturers -- most of which are over now -- probably "borrowed" many sales from the second quarter, he said. On the other hand, there is no overhang of business inventories to depress production in future months as businessmen try to get their stocks back in line with sales, and that is some insurance against a sharp downward movement in the economy, Perry noted.
John Davis, vice president of the Cleveland Federal Reserve Bank, is another economist surprised by the economy's performance but still expecting a slowdown. "If we have been growing at a 6-plus percent rate, I believe we will grow markedly less rapidly in the next three quarters," Davis said. "It is hard to look ahead at the sluggish growth in real incomes" and see any way the increases in consumer spending of the last three quarters can be maintained.
Consumers have stepped up their buying partly by saving less. Personal saving was 6.1 percent of disposable personal income in the third quarter of 1980. It dipped to 5.1 percent in the fourth quarter and on down to 4.7 percent -- an unusually low level -- in the first.
One positive factor seen by all three of these men, and many of their colleagues as well, is a slowing of inflation. Consumer prices rose in March at a 7 1/2 percent annual rate, much less than in preceeding months. With some energy prices, such as those for gasoline, and home purchase prices now falling and the expected jump in food prices not yet materializing, inflation could be lower for some months to come. That kind of news could encourage consumers to keep spending.