The administration's chief economic adviser issued new and even gloomier forecasts for the economy yesterday, casting doubt on President Reagan's prediction last month that the current recession will be only "slight."
The nation's output will slump by between 3 percent and 5 percent at an annual rate in the final three months of this year, and will probably grow by only 1 percent in 1982, Murray L. Weidenbaum, chairman of the Council of Economic Advisers, told reporters yesterday. He also repeated his recent warning that unemployment could climb as high as 9 percent by next March, matching the previous postwar peak. Meanwhile, he predicted that inflation will come down to an annual rate of 7 percent to 8 percent in 1982.
Weidenbaum told reporters that he expected output to fall further in the early months of 1982. However, "the worst of the recession hopefully will be behind us as 1982 unfolds," he said. The depth of this recession, Weidenbaum said, would be "about . . . average rank for the postwar period."
He and other Reagan officials have now drastically revised their original assessment of how the economy will react to Reagan's economic program, pushing farther into the future their predicted recovery. But the CEA chairman said he still expected a "strong recovery" in the second half of next year. The economy will grow at an annual rate of 5 percent or more by then, he said, after showing no overall growth in the first half of the year.
Last January, Reagan predicted real economic growth, after accounting for inflation, of 4.2 percent from 1981 to 1982. By July, this was scaled down to 3.4 percent. Last month, Treasury Secretary Donald T. Regan told a Senate panel that he believed 1982 growth would come close to 2 percent, and now Weidenbaum has revised the number down still further to 1 percent.
In July the president's economic forecasts showed unemployment falling from a level of 7.7 percent at the end of this year to 7.0 percent by late 1982. However, the jobless rate has already climbed to 8 percent and is now expected by officials to go substantially higher in coming months.
There has been a long debate within the administration over how pessimistic the next official forecast, to be published in January, should be. Although Weidenbaum's new numbers are more pessimistic than earlier official statements, they still show a better recovery than some private economic forecasters expect. Weidenbaum said he was giving his personal view of the economic outlook, but that he expected the January forecasts to be in line with his numbers.
Some private economists predict that there will be virtually no overall growth next year and that a recovery will soon lead to another run-up in interest rates as it comes into conflict with the Federal Reserve's tight money policy.
Weidenbaum said yesterday, however, that he believed next year's recovery would be sustained into 1983, which he predicted would be a "prosperous" year. Interest rates and inflation were both on a downward trend, he said, although rates may not fall steadily.
There will have to be further measures next year to bring about a "substantial" reduction in the fiscal 1983 budget deficit, he added. These could include new tax increases from closing loopholes, or levying a windfall profit tax on deregulated natural gas. So far the adminstration has backed away from these proposals.
The dismal outlook for the near term was the "rocky road the economy travels on the path to stronger growth and less inflation," Weidenbaum said yesterday. Many critics charged earlier this year that Reagan was trying the impossible in his attempt to bring down inflation and raise economic growth simultaneously. Weidenbaum yesterday conceded that the "adjustment" to a lower path of inflation through a restrictive money policy "is accompanied by rising unemployment." However, a simultaneous reduction in inflation and expansion in the economy will be possible next year, he said. His forecasts assume that the Federal Reserve keeps money growth within its stated targets of 2 1/2 percent to 5 1/2 percent growth next year.
Weidenbaum rejected the suggestion from a number of Republican members of Congress yesterday that the next installment of the income tax cuts, scheduled for July 1982, should be advanced to January to boost the economy. This would be destabilizing, and a return to past stop-go policies, Weidenbaum said.
Prices, as measured by the Consumer Price Index and the wider GNP deflator, would rise by 7 percent to 8 percent from 1981 to 1982, Weidenbaum predicted, compared to an expected rise of about 10 percent for 1981 as a whole.