The booming economic recovery of late spring and early summer, sparked by an unexpected surge in consumer spending, has slowed and forecasters are uncertain exactly what comes next.
Retail sales declined in July and August as automobile sales continued to fall short of Detroit's hopes. Monthly gains in industrial production are slowing now that sales have flattened, and businesses have begun to accumulate inventories once more.
Housing construction, which began its recovery a year ago, has hit a plateau, if not a pothole, as a result of higher mortgage interest rates. And a rapidly growing trade deficit is hurting export-oriented industries, as well as those whose products face competition from foreign imports.
Slowing is a relative term, however. The spring quarter was extraordinary, with the gross national product, adjusted for inflation, rising at an unsustainable 9.2 percent annual rate. Partly because the level of economic activity at the end of June was considerably higher than the average for the second quarter, forecasts for the current three months generally show at least a 7 percent growth rate.
But at the moment, the economy does not appear to be expanding at such a strong rate. From this point forward, the consensus among forecasters calls for fairly steady but modest economic growth through 1984. Inflation is expected to bounce back to somewhere between 5 and 6.5 percent as unemployment falls to between 8 percent and 8.5 percent by late next year.
However, some economists are less optimistic, and virtually none expects the economy to continue--as Treasury Secretary Donald T. Regan put it last week--to "sit up on its haunches and roar" now that it has been "unleashed."
For instance, Richard Everett, chief domestic economist for Chase Manhattan Bank, predicts the recovery will lose enough steam that unemployment will still be 8.9 percent in the fourth quarter of 1984. He is equally gloomy about inflation, seeing consumer prices rising at a 7.2 percent annual clip by then. High and rising interest rates will keep a tight lid on economic growth, he said.
Just as has been the case during much of the last three years, most of the uncertainty in the forecast indeed revolves around the Federal Reserve's monetary policies, the level of interest rates and how those rates will affect economic activity.
Regan, the administration's economic spokesman and cheerleader, last week reiterated his prediction that "I think we are going to see lowering rates of interest." One reason, he said, is that strong economic growth will increase business profits and reduce private sector borrowing needs.
Except on a temporary basis as rates zig and zag a bit, most forecasters are less sanguine than Regan, and most expect continued economic growth to raise, rather than lower, private credit demand.
The optimists among the forecasters think rates will, on average, be little changed over the next 18 months. A middle group believes rates have already touched their lows for this business cycle and will rise slowly but steadily as the recovery forges ahead. A few pessimists fear a clash between public and private demand for credit, with a stingy Federal Reserve refusing to accommodate both, will generate a new interest rate spike and precipitate a new recession sometime next year.
But even if rates do not rise, some economists argue that they are already so high in real terms--that is, adjusted for expected future inflation--that they are producing a "lop-sided" recovery.
Council of Economic Advisers Chairman Martin S. Feldstein, in direct disagreement with Regan last week, said that high real rates have boosted the value of the dollar on foreign exchange markets, worsened the American trade deficit and harmed U.S. industries producing for export or those competing against imports. Feldstein also believes that high real rates will hold down long-term capital investment by U.S. businesses.
Economist Alan Greenspan, the former CEA chairman who heads Townsend-Greenspan & Co., also said the current high level of real rates is limiting business investment in long-lived assets and likely will leave the recovery "stunted." The lack of such investment ultimately will mean slower growth of productivity and standards of living, he warned.
Greenspan's solution? Reduce pressure in financial markets by reducing prospective $200 billion federal budget deficits, though he doubts that is likely before 1985, if then.
The current recovery, which the National Bureau of Economic Research says began last December, has already reduced the civilian unemployment rate from that month's peak of 10.8 percent to 9.5 percent in August. But the gap between the economy's actual level of output and its potential output is still so large that at 9.5 percent, the unemployment rate is still higher than it was at the peak of the 1974-'75 recession.
After falling in four of the previous five quarters, the gross national product, adjusted seasonally and for inflation, rose at a 2.6 percent annual rate in the first quarter of this year and then shot up at a 9.2 percent rate in the second quarter. The index of industrial production, which rose 0.9 percent in August, is 11.6 percent above last November's low, but still 2.2 percent below its July 1981, peak when the recession began. Even then, of course, the economy had not recovered fully from the brief but sharp 1980 slump.
On Wednesday, the Commerce Department's Bureau of Economic Analysis will release officially for the first time a so-called "flash estimate" for this quarter's GNP. In the past, the flash estimates, which are based on partial and preliminary figures, have not been released by BEA, though they have regularly been leaked to the press, and recently have been made public by high-ranking Commerce officials.
After the approximately 7 percent rate of increase the current flash is expected to show, forecasters generally expect much smaller numbers. For example, Data Resources Inc., an economic consulting firm, predicts real GNP will rise at a 4.8 percent rate in the fourth quarter, with each quarter next year showing a smaller gain than the preceding quarter, reaching a 3.7 percent rate in the final three months of 1984. From the final quarter of this year to the same quarter of 1984, the DRI forecast shows a 4.1 percent increase in real GNP, compared with a 6 percent rise during 1983.
Even so, DRI must be counted among the more optimistic forecasters. With that rising level of economic activity, DRI predicts that the unemployment rate will fall to 8.1 percent by late next year. And despite some upward push on food prices from this year's drought, the firm optimistically sees consumer prices climbing less than 5 percent next year. Falling energy prices and the effects of the recession will hold this year's increase to 3.2 percent, the lowest rise since 1967, DRI said.
The Reagan administration's latest forecast, issued in July, is much in line with the DRI predictions, once the administration numbers are updated to reflect the surge in GNP in the second and third quarters of this year. CEA's Feldstein said real GNP should rise more than 6 percent this year, rather than 5.5 percent as shown in the mid-year forecast.
Last December, administration economists pegged the GNP rise this year at a modest 3.1 percent. In April, as evidence mounted that a recovery was well under way, that was revised upward to 4.7 percent. Thus, growth this year will be about twice as rapid as foreseen last December by the administration--and most other forecasters--unless the fourth quarter comes in well under current expectations.
For the four quarters of 1984, the administration has not updated its prediction that real GNP will increase about 4.5 percent while the rise in consumer prices stays slightly under 4.5 percent.
The slowing of the recovery's pace is in line with what Feldstein believes is consistent with sustaining economic growth without triggering a new round of inflation. Regan and Treasury's supply-side economists continue to disagree that a continued rapid recovery would carry an inflationary danger--hence the secretary's approving comments about an economy sitting up and roaring.
But the policymakers at the Federal Reserve clearly are in agreement with the CEA chairman, not Regan. In May, when the economy was roaring and private credit demands were increasing rapidly, Fed Chairman Paul A. Volcker persuaded a majority of the central bank's policymaking group that monetary policy should be tightened a small notch. That action ultimately led to an increase of about 1 1/2 percentage points in an array of short-term interest rates and somewhat smaller increases in long-term rates.
Now that the roar has been muted and all measures of the money supply are within the target ranges set for them by the Fed, the central bank seems unlikely to tighten credit further in coming weeks. The intention, according to Volcker and other Fed officials, is not to choke off the recovery, but rather to keep it going in as non-inflationary a way as possible.
The uncertainty about the Fed's precise course and about the impact of federal government borrowing needs on interest rates has kept many investors on the sidelines recently. Market observers say many banks and other institutions are flush with cash but are unwilling to chance the substantial losses they would incur if long-term rates move up after they have bought long-term securities.
Economists confront a similar uncertainty in assessing the future course of final sales of goods and services. The second-quarter surge was the combined product of a buying spree by suddenly more confident consumers and a traditional swing by businesses from cutting inventories toward rebuilding them. After this quarter, inventories will be much less of a factor in determining the rate of GNP growth.
At the same time, consumer spending is apt to rise much more in line with gains in real disposable personal income. In the second quarter, consumers lowered their saving rate sharply to finance their spending. This quarter, the saving rate is rising again toward a more normal level as spending increases slow down.
Meanwhile, business investment in plants and equipment has begun to grow again. Some forecasters, such as those at Chase Econometrics, predict it will increase relatively slowly for the next several quarters, while others think stronger gains are in store. If long-term interest rates rise from current levels, all the forecasters would trim their investment figures.
Housing construction will add little, if any, push to the economy, according to virtually all forecasters. A few, such as Donald Ratajczak of the Georgia State University Economic Forecasting Project, think increasing mortgage interest rates will cause a substantial decline in housing by year's end, a decline that will, in turn, lead to lower rates in early 1984 and a rebound later in the year.
Federal government purchases of goods and services will be rising strongly during 1984 under the impetus of defense spending. Federal purchases could be up as much as 6 percent to 9 percent next year, according to various forecasts. State and local government purchases are likely to grow, but much more slowly.
Finally, foreign trade will be a major drag on the economy throughout next year. The merchandise trade deficit is forecast to run somewhere between $75 and $100 billion, compared with around $60 billion this year and about $35 billion in 1982.
If the current consensus turns out to be correct, 1984 won't be a bad year and the recovery will continue at a moderate pace without a significant resurgence of inflation.
But the risks generally are on the downside. Food price inflation could be worse than now expected. A more pointed conflict could develop between public and private credit demand so that interest rates are pushed upward. A major foreign nation, such as Brazil, could default on its international loans and disrupt financial markets. Or cautious consumers could again decide to sit on their hands rather than flock to auto showrooms to buy cars at recently increased prices.
The recovery, so far, has turned out to be just about an average one compared with other post-World War II recoveries. Whether it will stay that way is a very hard call.