President Carter's top economic advisers warned him yesterday that the U.S. economy could be hit with a recession severe enough to require government action, such as a tax cut, to counter it.
The warning signals no immediate change in economic policy, the White House insisted, but it probably spells an end to Carter's first stance against a tax cut in 1980 and his hopes of balancing the federal budget in 1981.
Officially, the administration will update its economic forecast and budget estimates next week. The update still may not include a recession forecast, but yesterday's warning was based on the distinct possibility that a recession lasting three calender quarters could begin later this year, sources said.
The advisers blamed the cumulative oil price increases by the Organization of Petroleum Exporting Countries that have now exceeded 50 percent this year for the worsening economic outlook.
Carter met with the advisers, including Treasury Secretary W. Michael Blumenthal, Charles Schultze, chairman of the Council of Economic Advisers, and James McIntyre, Director of the Office of Management and Budget. at the White House yesterday morning before flying to Camp David to work on a major televised energy speech he will deliver tomorrow at 9 p.m.
After the meeting, White House press secretary Jody Powell declared, "It is clear that the economic impact of the OPEC action will be severe. It is also clear that the extremely large increases in prices since December are the root causes of our economic problems."
"It is imperative, and it is our intention," Powell continued, "to carefully monitor with the Congress and with business and labor, economic developments over the next several months so that well-considered decisions on the economy can be made and implemented at the appropriate time.
"These decisions will have to be made consistent with a determination to continue the fight against inflation, protect the integrity of the budget and protect the dollar overseas," he said.
Administration economists later underscored Powell's point that no decisions to change policy are imminent.
"If you are going to make any progress against inflation, the president can't afford to turn and run the other way at the first sign of weakness in the economy," said one Carter economist.
"The president is very, very strongly committed to giving a balanced bugdet," he added, "and it would be inappropriate for him to back away from that now."
The key work is "now."
As recently as May 29 in a news conference, Carter declared, "I doubt very seriously that we will have any tax cut in 1980. My own major responsibility is to deal with the inflation question . . . If we have the option between substantial reductions in the deficit and controlling inflation on the one hand, and having tax reductions for the American people in an election year on the other, I would forgo the tax reduction and insist upon controlling inflation and cutting the deficit."
And in recent planning sessions on the 1981 budget, the president was still stressing that it should be balanced.
Carter himself began the always difficult process of laying the groundwork for a possible policy shift during his return flight from the Tokyo economic summit meeting last weekend. The recent OPEC price increases, he told reporters, make a recession "much more likely than it was before."
The administration has estimated that the higher oil prices will add one percentage point to the inflation rate both this year and next, and cost Americans about 800,000 jobs between now and the end of 1980.
But in the short run, actual shortages of gasoline and diesel fuel -- not just higher prices -- are hurting already slumping consumer spending and probably industrial output, too.
Some private forcasters, such as Otto Eckstein of Data Resources Inc., believe a recession has already begun and that it could last until the end of the year, with unemployment rising above 7 percent early in 1980.
Other forecasters differ over both the timing of the recession and its severity. Alan Greenspan, a former chairman of the CEA, for instance, expects a mild bounce-back this summer before the recession sets in in earnest.
Mirroring this uncertainty, Carter's advisers are telling him to wait and see what happens, while assuming a public stance from which he can change his policies if necessary without giving the appearance of turning on a dime, administration sources said.
Because of the continued struggle with inflation, running at a nearly 14 percent rate in recent months, any decision to give the economy a boost probably would involve a very modest amount of stimulus, the sources added.
Last week, for example, OMB's McIntyre told some members of Congress that the administratin would not greatly expand costly public service jobs programs even with a recession.
On the other hand, Vice President Mondale, in a speech to the National Education Association in Detroit yesterday said that in the event of a recession, "We will help cities like Detriot. We will try and take the load off of them."
After meeting with his economic advisers, the president met with officials working on his new energy program, the outline of which he will present tomorrow night. That session had a three-point agenda, Carter said:
"The synthetic fuel approach that will be the goal of my administration.
"The distillate [heating oil and diesel fuel] picture for this winter and the balance of this summer.
"The gasoline situation both during this summer and the future, and what we will do to prevent mal-allocation of fuel and minimize the adverse impact of the recent OPEC decision on our country."
Carter is expected to propose a major expansion of government spending for synthetic fuels production in his speech.
Powell said that full details of the lastest Carter energy plan would not be made public for 10 days to two weeks after the speech. The press secretary would not disclose other options being considered, but he did say, "There are none that do not involve substantial trade-offs of one kind or another . . . There are no effective actions that can be taken that do not have their costs." CAPTION: Picture 1, Carter: seeking "to prevent mal-allocation of fuel" and minimize OPEC impact By Frank Johnston -- The Washington Post; Picture 2, At energy meeting, President Carter is flanked by Secretary Schlesinger and domestic affairs advisers Eizenstat. AP