After repeated predictions of an economic slowdown amid continued record-breaking growth, many economists are now convinced that the expansion has indeed cooled.
At this point in an economic expansion, a slowdown is generally welcome, but it may not bode well for everyone.
Economists point toward recent indicators of a cooling economy such as the decline in growth of output of the nation's goods and services from an average 8.6 percent rate in the first half of the year to a 3.6 percent rate in the third quarter.
In addition, retail sales have decreased for the last two months, with most sales categories reporting declines; housing starts, particularly for single-family homes, have declined since the first quarter; new orders for durable goods have been relatively flat since the beginning of the year, and employment has been growing slowly since the spring.
"As anticipated, the rate of economic growth has decelerated dramatically from the rapid pace experienced during the first half of the year," wrote Lawrence Chimerine of Chase Econometrics in a recent report.
"In fact, the degree of weakness in some recent statistics has raised the possibility that the sharp slowdown we have been forecasting during 1985 is occurring earlier -- concerns that a recession is about to begin have even surfaced."
However, few economists, including Chimerine, said that this slowdown signals the end of the current expansion in the near term.
"The signs are now clear that economic growth is moderating from the breakneck pace of the past two years," said Wharton Econometric Forecasting Associates. However, by the middle of 1986, growth probably will be halted by high interest rates, Wharton said.
Economists have hoped for a slowdown of activity that would reduce demand pressures in the economy and alleviate any bottlenecks and shortages in production that could lead to accelerated inflation.
However, in addition to the improvement in inflation, economists expect other changes from a slowdown. For example, when the economy slows, incomes grow more slowly and spending on imported goods tends to decline, which would improve the record U.S. trade deficit.
On the other hand, as Americans buy fewer foreign-made goods, the earnings of other countries will decline. This phenomenon will particularly exacerbate the problems of Third World debtors who rely on exports to pay their debts and expand internally.
Robert Hormats, formerly an assistant secretary of State for economic and business affairs, told a conference of business economists last week that the impact of high U.S. interest rates on Third World debtor countries has been somewhat offset by increases of their exports, particularly to the United States.
However, Hormats warned that "if the economy turns down while interest rates are high -- and nothing is done to reduce the federal budget deficit -- that would reduce the offset of high interest rates. This is an extremely difficult problem."
Another consequence of a slowdown could be slower growth in company profits, said Commerce Department chief economist Robert Ortner. That, in turn, could reduce the value of the dollar because stocks and other investments might become less attractive, Ortner said.
The possible strengthening of the dollar also would contribute to improvement in the trade deficit because foreign-made goods would become relatively more expensive, Ortner said.
However, the capital flight by foreigners that could result would lead to an increase in interest rates as borrowers offer higher rates to attract funds.
Part of the reason for the slowdown has been the high level of interest rates, which tend to depress consumer spending on durable goods and some business spending.
As the economy slows and demands for credit cool, interest rates are expected to move downward. Short-term rates -- following the lead of long rates -- already have edged down slightly, in part because of a reduced demand for credit by businesses, economists said.
In addition, the expected moderation in inflation should preclude the Federal Reserve from tightening credit, another factor alleviating upward pressure on interest rates.
"Increasing evidence of a fading economy, slack short-term business credit demands, prospects for continuing low inflation rates, and a reversing of perhaps an overcorrection by the Federal Reserve . . . this summer have set up the fundamentals for another dose of downticks in interest rates," Allen Sinai, chief economist for Shearson Lehman/American Express, said in a recent report.
Sinai said he is now questioning whether higher rates earlier predicted for later this year and the first part of next year "will actually materialize."
In fact, some economists said that because of the slowdown and the reduction in interest rates, the economy is only experiencing a pause and rapid growth will resume in the fourth quarter.
Timothy Howard, writing for the Federal National Mortgage Association, said that the economy "most likely will not continue to move sideways, but instead is poised for a rebound.
"We believe that what we have experienced recently is not so much a bout of fundamental weakness as a fairly normal flat spot of the sort that often has accompanied transitions from very rapid output growth to more sustainable growth rates in the past," Howard said.
Still other changes resulting from the slowdown would be a reduction in the growth of new jobs. The civilian unemployment rate has been at 7.5 percent in the past few months and the average manufacturing workweek last month declined 0.1 hours, "reflecting a slackening demand for labor," Sinai said.