Most of the economic news in recent weeks shows that business has slowed sharply since spring. A majority of forecasters think the pause in growth is only temporary. Lower interest rates, they say, will encourage consumers to buy more houses and cars, and move the economy forward for at least another year.
But a growing minority believe another recession is hulking into view.
At this point, there's no way of knowing which side is right. But here are five money-planning ideas that would serve you well in either case.
For your cash: Money-market mutual funds now pay, on average, around one-half a percentage point more interest than the money-market deposit accounts in banks and savings and loan associations.
When bankers first introduced money-market deposit accounts, they priced them to yield more than money funds. But once they got their customers, they cut rates back. Banks might again raise interest rates, relative to money funds, whenever they want to attract new accounts. But over a year, savers should get better yields by going to money-market mutual funds.
For longer-term savings: Interest rates have been falling for a couple of months. If another recession develops, they'll drop a lot further. So you would want to lock up today's rates by buying three-to-five year Treasury notes or federally insured certificates of deposit.
If business expansion picks up steam next year, interest rates would start rising again. Even so, it is possible rates might not rise by more than a percentage point or so.
If you wait, you might get a higher interest rate but run the risk of having to take a lower rate if a recession develops. So you have a lot to gain and little to lose by buying medium-term interest-rate investments now. Insured CDs and Treasury notes are yielding a big return over inflation, and they're safe.
For speculative investments: Anyone who believes a recession is coming should not be buying stocks. Instead, you might try Treasury bonds bought on margin (you get a capital gain when interest rates fall), or interest-rate futures.
If you believe the recovery will continue for another year or more, you'll be looking at stocks. But even if the optimists are right, it won't be easy to make money. Business growth will be slower, and profit gains smaller. Many companies are already reporting lower earnings. That's not conducive to a broad upturn in stocks.
Companies most likely to do well are interest-rate-sensitive issues such as utilities; high-dividend paying companies; those with something to gain from lower oil prices, such as chemicals; and the few companies that still show expanding profit margins, such as some foods. But it would do well to be cautious about how much you commit to stocks, and be selective.
For home-buyers: Mortgage rates have been ticking down since June. The national average for fixed-rate loans is now around 14 percent, with adjustable loans a little below that. Mark Riedy of the Mortgage Bankers Association believes rates will edge further down for the next few months. So, you may be able to get a better deal next spring.
Nor do you have to worry about paying a higher house price if you wait. On average, the price of homes is rising very little, if at all. Some home values have soared. But taking the past six years as a whole, the rise in average house prices fell behind inflation. So in real terms, houses in general have gotten cheaper.
And except for some first-year promotional rates, Riedy notes there is no longer a great difference between fixed and adjustable mortgages. That makes fixed-rate loans more attractive for home-buyers who want to be certain of future costs. (For those who predict flat to lower interest rates for many years, a well-structured, adjustable mortgage is the better buy.)
For small-business owners: Salomon Brothers warns that doing business will be tougher next year, even without a recession, because of slower growth. Low inflation means it's hard to pass higher costs on to consumers, so business profits are going to be squeezed. Businesses that borrowed at high interest rates will find themselves undersold by competitors who are carrying less debt. It's a time for caution and cost-cutting, while you wait to see what the 1985 economy brings.