Bush administration economists, appearing unshaken by the latest signs of a rapidly weakening economy, predicted yesterday that the current recession will be short and mild with a rebound by midyear.
In the economic assumptions used to prepare the fiscal 1992 federal budget sent to Congress yesterday, the administration forecast that the recession would be confined to the fourth quarter of last year and the first three months of this year. The gross national product, adjusted for inflation, will rise 0.9 percent during 1991, according to the forecast.
The recession will raise the budget deficit for the current fiscal year to an estimated $318.1 billion, up $71 billion from the previous estimate. The deficit was $220.4 billion last year.
To help make sure a recovery arrives on schedule, administration officials called on the Federal Reserve to keep cutting interest rates.
Both Michael Boskin, chairman of President Bush's Council of Economic Advisers, and Richard Darman, director of the Office of Management and Budget, said the new forecast is similar to those of many private economists and slightly less optimistic than that of the Congressional Budget Office.
The administration's 0.9 percent growth forecast for this year is identical to last month's consensus of a group of prominent forecasters summarized in Blue Chip Economic Indicators. For 1992, however, the Blue Chip consensus was for a 2.8 percent rise in real GNP, compared to the administration's 3.6 percent gain. The CBO forecast calls for 1.3 percent growth this year and 3.4 percent next year.
Boskin said the administration should get credit for the forecast's candor. "This will be the ninth post-World War II recession, and this is only the second time ... that an administration, Republican or Democrat, has forecast a recession prior to actually having the data on two negative quarters of real GNP," he declared.
"The projected recession is likely to be mild," Boskin said. The administration projects a 1.1 percent economic decline from the onset to the end of the recession, compared with an average decline of 2.6 percent during the other postwar recessions.
But Darman said that the new candor about the economy stemmed in part from changes last fall in the Gramm-Rudman-Hollings balanced budget law, which now permits spending and deficit targets to be adjusted as the economy shifts directions.
"It takes away the incentive that used to be there for the administration -- and later the Congress -- to intentionally or unintentionally misestimate in the rosy direction," Darman said. "There is nothing to be gained from that under the new system. There is nothing to be lost from being direct, honest with your best estimate, so you're getting our best estimates. And I suspect that may be the reason that for the first time in quite a long while, you see us slightly more pessimistic than CBO."
If the recession lasts longer or the recovery is less vigorous than projected, the 1991 and 1992 deficits would swell further. A 1 percentage point lower growth rate for both years could add more than $20 billion to the 1992 deficit of $280.9 billion.
The administration's forecast also showed consumer price inflation dropping this year to 4.3 percent from last year's 6.2 percent rate and falling further to 3.9 percent next year.
Unemployment in the fourth quarter of this year will average 6.6 percent, up from a 5.8 percent average in the fourth quarter of 1990, according to the administration.
After this year's recession is over, the administration's economic assumptions project growth of 3 percent or more annually through 1996, with inflation falling slowly to less than 3.5 percent and unemployment dropping close to 5 percent.
For such a favorable combination of growth, inflation and unemployment to occur, productivity -- output per hour worked -- would have to increase 1.9 percent a year, well above the 1.3 percent annual average between 1982 and 1990. In 1989 and 1990, productivity declined slightly as the economy slowed down.
The administration's forecast assumes that capital investment and immigration of foreigners with needed skills will combine with other factors to boost productivity.
Boskin acknowledged that "there certainly is a professional disagreement among economists" as to how fast the economy can grow without causing an acceleration of inflation, once "full employment" is reached. There is also disagreement about what level of unemployment is consistent with a stable rate of inflation.
Some economists believe that the "full employment" rate is about 6 percent, meaning that if the jobless rate falls below that point and stays there for some time, inflation will accelerate. To those analysts, aiming at a 5 percent unemployment rate, as the administration is doing, eventually would lead to higher inflation.
"We don't agree," declared Boskin. The United States had managed to keep unemployment "in the low fives" for about 18 months in 1988 and 1989 without an acceleration in price increases, he said. He added, however, that if the economy had kept growing at the 4.5 percent rate of 1987 and 1988, it would have caused inflation to rise significantly.
But having an unemployment rate close to 5 percent will not by itself cause inflation to get worse, he asserted.
Many Federal Reserve officials have said they believe that the economy cannot grow faster than 2 percent or 2.5 percent a year once full employment is reached without causing inflation problems. When unemployment is higher, however, faster growth is possible without causing the economy to overheat because of the slack in labor markets and unused production capacity in U.S. factories.
The administration forecast assumes a steady decline in both short- and long-term interest rates during the next several years. The averages predicted for this year are close to current levels. But some analysts said the Federal Reserve is likely to raise rates at some point after the recovery begins to keep growth moderate and ensure that inflation does not rise.
If it turned out that growth were to average about 2.5 percent a year from 1993 through 1996, instead of the 3.5 percent average in the administration forecast, it could mean that in 1996 the budget would still be $40 billion or $50 billion in the red rather than being $20 billion in the black, as shown in the budget yesterday.