The Reagan administration's forecast of a 4 percent economic growth rate this year assumes that most major parts of the economy will expand less rapidly in 1986 than they did last year, according to the Council of Economic Advisers' annual report to the president released yesterday.
Consumer spending and business investment in new plants and equipment are predicted to rise more slowly this year, while federal government purchases of goods and services decline.
State and local government spending and housing construction are expected to rise, and some limited improvement in the trade deficit is forecast by the latter part of the year.
But the driving force behind the administration's forecast of a gain in growth from last year's 2.5 percent rate to 4 percent in 1986 is a very large increase in business spending for inventories, apparently nearly $50 billion worth.
CEA Chairman Beryl Sprinkel, testifying on the report, said recent declines in oil prices and interest rates make him more confident than ever that the economy will grow at least 4 percent between the fourth quarter of 1985 and the fourth quarter of this year.
When private forecasters complete ongoing revisions to their own predictions, the 4 percent figure will be in the middle of the forecasts, Sprinkel told the Joint Economic Committee.
But two economists who testified later in the day sharply questioned the administration forecast, particularly the large assumed increase in business inventories.
Lester Thurow of the Massachusetts Institute of Technology challenged the details of the government forecast, saying that figures presented in the CEA report were not consistent with the prediction of 4 percent growth.
"There is just something wrong with this forecast," he declared.
Lawrence Chimerine of Chase Econometrics was also troubled by the apparent contradictions in the administration forecast.
"The probability of getting 4 percent growth this year is considerably less than 50 percent," he said.
The figure is more likely to be about the same as last year's 2.5 percent, with much smaller additions to business inventories, he said.
Another administration economist, who was asked about the inventory forecast, called it "reasonable" and noted that it was based in part on the assumption that a much smaller share of the 1986 farm crop will end up in the government's hands than was the case in 1985. That assumption is also the reason federal governments purchases are expected to fall this year, the economist said.
The third economist testifying, former CEA chairman Alan Greenspan of Townsend-Greenspan & Co., said he was "slightly more optimistic" than Chimerine. "I think 4 percent is not implausible for the next two or three or four quarters, and that is what the administration is predicting."
But Greenspan was much less sanguine about 1987, for which the administration also forecasts a 4 percent expansion. Greenspan's own latest forecast includes a recession sometime next year.
JEC Chairman David Obey (D-Wisc.) questioned Sprinkel and the private economists closely about the problems that could arise next fall with meeting the federal budget deficit-reduction targets of the Gramm-Rudman-Hollings law if the economy does not grow as fast as the administration expects.
If the forecast is off by only about 1 percent -- that is, if the economy grows at a 3 percent rate instead of 4 percent -- it would add significantly to the deficit, Obey said.
Suppose Congress and the president had agreed upon $38 billion worth of spending cuts, the amount that the administration believes is needed, thinking that will be enough to meet the fiscal 1987 GRH deficit target of $144 billion, he continued. If growth has been lower, "we will wake up in August and say, 'Sorry boys and girls, we have to do it all over again and cut another $30 billion,' " Obey told Sprinkel.
"I hope to god your numbers are accurate, or, by August, all hell is going to break loose," the chairman declared.
Under provisions of the Gramm-Rudman-Hollings law, the Office of Management and Budget and the Congressional Budget Office must update their economic forecasts and budget projections in August.
With slower growth, spending would be higher and revenue lower and meeting the deficit target would require more cuts or tax increases.