Treasury Secretary Donald T. Regan yesterday urged the Federal Reserve to ease its monetary policy, which he called "a little on the tight side," and said that interest rates would drop further next year if the Fed did so.
The Treasury secretary also predicted that "the economy will remain buoyant, but not overheated" and grow this quarter at a 4.2 or 4.3 percent annual rate. The "many alarmists who are suggesting that 1985 will be a negative one, or at best a year of low growth," are wrong, Regan said, reiterating the administration's forecast that the economy will expand at a "rate of 4 percent or so" faster than inflation next year.
A substantial number of private economists expect a rebound in the pace of the expansion from the third-quarter rate of 2.7 percent to about 4 percent this quarter and next, but then a period of little growth for much of the rest of 1985. However, other more optimistic forecasters, like Regan, do not foresee such a slowdown next year.
Regan's criticism of the Federal Reserve, his first in several months, came in a speech here to the U.S. League of Savings Institutions. He noted that the money supply measure known as M1 has grown by only 1.5 percent since last June and by less than 1 percent in the last 13 weeks. "By anyone's yardstick, that's not loose money. It leaves a lot of room for the Fed to ease," he declared.
"If the Fed does ease money over the next several months, as conditions seem to warrant, and many are forecasting, then I believe interest rates will continue to decline," Regan continued. "After all, a 12 percent prime interest rate in a time of 4 percent inflation, and 4 percent real growth, is out of line with any historical perspective."
Most short- and long-term interest rates have fallen between 1 and 2 percentage points in the past two months or so. Analysts believe they have declined for several reasons, including the sharply slower pace of the expansion and some modest easing of Federal Reserve policy.
At a press conference after the speech, Regan conceded that the Fed has maintained the kind of stable monetary policy he has called for "over the last 12 months." But recent growth of M1 -- the money measure that includes currency in circulation and checking deposits at financial institutions -- has been "less than 1 percent, and as I alluded to in my speech, I think that's a little on the tight side and there's room for easing, in my judgment," he said.
In his speech, the Treasury secretary said that the administration was not surprised by the slower economic growth because it had been so strong in the first half of 1984 as to be unsustainable. "But the current quarter should be a reasonably good one," he said. "Automobile production will be on the upswing, consumers will have money to spend for the holiday season, if they choose to buy. I think they will, and that retail sales will be excellent."
Meanwhile, the Labor Department reported that, as a consequence of the slowdown in economic growth, productivity at the nation's businesses other than farms failed to increase at all in the third quarter.
It was the first time since the spring of 1982 that nonfarm productivity had not gone up, and it contrasted with a 5.5 percent gain in the second quarter of this year. If farms are included, productivity -- output per hour worked -- rose at a 1.7 percent rate last quarter, down from a 4.9 percent rate in the second.
The Labor Department's report on productivity and costs indicated widely varying movements among different sectors of the economy. Productivity in manufacturing rose at a very strong 8 percent rate, indicating a substantial decline in productivity in nonfarm, nonmanufacturing areas.
In the nonfarm business sector, to which many economists pay the closest attention, output and the number of hours worked rose 1.6 percent in the third quarter. Thus, output per hour worked was unchanged from the second quarter.
Compensation per hour rose at a 3.7 percent rate, the same as in the second quarter. But because of the unchanged productivity level, the increase in compensation translated directly into a similar 3.7 percent rate of rise in unit labor costs, which in the second quarter had dropped at a 1.7 percent rate.
Between the third quarter of 1983 and the last quarter, productivity in the nonfarm business sector was up by 2.3 percent. That was the smallest gain over a four-quarter period since the one ended in the first quarter of 1983, when productivity rose 1.8 percent.
The four-quarter increase in productivity has dropped more or less steadily since peaking at 4.3 percent in the second quarter of 1983. For the four quarters ended this spring, the increase was 2.9 percent.
Some analysts, such as Richard Rahn, chief economist of the U.S. Chamber of Commerce, believe that the surge in capital spending by businesses during this expansion can lead to sustained, large, rapid increases in productivity. If so, the economy could grow faster -- without adding to inflation -- than even the 4 percent rate the administration has forecast, according to Rahn.
However, other economists, including Walter W. Heller of the University of Minnesota and George L. Perry of the Brookings Institution, think any such increase will be of modest dimensions, and as yet they see no sign even of that.
"If the trend growth in productivity quickens, it would help keep the inflation rate down as the economy moves up," Heller and Perry wrote recently in describing a joint forecast done for National City Bank of Minneapolis. "But productivity has not produced any pleasant surprises thus far in the recovery.
"Granted, the 3.9 percent average rate of growth in productivity in the nonfarm business sector during the first year and a half of recovery looks fairly strong," they continued. "But that occurred during a period of very vigorous growth in output when one expects a strong upswing in productivity. Indeed, careful analysis of the numbers yields little or no sign as yet that the underlying productivity trend has improved. We continue to believe that some improvement lies ahead -- but to date, it has not materialized."