A wave of good economic news, including the inviting prospect of sharply lower oil prices, may make 1983 a much better year than most forecasters had been expecting.
If world oil prices fall 20 percent or more, to $27 a barrel, as is widely predicted, consumer price inflation could run as low as 3 percent this year, according to some economists. Not since 1967 has inflation been that low in the United States, not even during wage and price controls a decade ago.
Lower inflation, all by itself, should make the economy grow faster as business costs fall and consumer paychecks go further. Generally, more conservative forecasts show the economy expanding at least 4 percent between the fourth quarter of 1982 and the fourth quarter of this year. Some peg growth at close to 6 percent, about a normal rebound from post-World War II recessions.
The Reagan administration's current, cautious forecast, agreed upon before Christmas, predicts a 3.1 percent rise in real gross national product over the four quarters of 1983. That forecast, published a month ago, will be revised upward when the administration sends Congress a required new set of budget estimates in mid-April.
"The world is working very much better now than in the week before Christmas when we finished that forecast," said Martin S. Feldstein, chairman of President Reagan's Council of Economic Advisers.
Nevertheless, plenty of question marks still stud the economic outlook, Feldstein and other economists note. One is the uncertain reaction of consumers and corporations if interest rates remain high relative to inflation. In addition, business executives seem determined to hold down costs by keeping payrolls lean, inventories low and major investments at a minimum. Moreover, if the recovery really takes off, the administration and the Federal Reserve could step in to slow it again in order to keep inflation from bouncing upward along with the economy.
Feldstein, principal author of the cautious administration forecast, agrees that it appears too low and should be revised. He also is far from sure what the new forecast, on which work has just begun, will show. "You should stick with the facts and not your visceral reactions in this business," he declares.
Three principal things have changed since December:
* Businesses that cut production below sales in the fourth quarter got rid of unwanted inventories at a record clip and have begun to increase output again to bring it back in line with sales.
* More and more people are convinced that a recovery is under way, so consumer and business confidence has improved substantially.
* Oil prices have dropped and may well continue to do so as a result of the availability of more oil than anyone wants to buy at current prices.
Every 10 percent decline in oil prices should add roughly one-third of a percentage point to economic growth this year, while knocking larger amounts off the increase in consumer prices, Feldstein estimates.
Meanwhile, the inventory swing is off to a faster start than Feldstein and many other forecasters had expected.
At the moment, most forecasts show real GNP rising at about a 4 percent annual rate this quarter instead of the 1 percent rate in the administration forecast.
But will the gains continue quarter after quarter?
Beginning in the second half of this year, the administration forecast called for an expansion at about a 4 percent rate indefinitely, with some quarters probably higher and some probably lower. The bulk of the current private forecasts are only a half a percentage point or so higher.
Thus, most of the changed outlook depends on how well things go in the first half of this year. Moreover, even a more rapid pace for two quarters or so could leave the unemployment rate at or above 10 percent late this year, the forecasters say. The rate in February was 10.4 percent.
As welcome as they are, the upward revisions in the forecasts are not enough to satisfy some members of Congress.
Last week, for instance, Democratic Sens. Daniel Patrick Moynihan (N.Y.) and Gary Hart (Colo.) introduced a resolution urging the Federal Reserve to make sufficient money and credit available to insure that economic growth over the next two years is at least an average 5.4 percent, its average during the first two years following most postwar recoveries.
According to calculations done for them by Data Resources Inc., an economic consulting firm, the policy would mean a 2.2 percent increase in real GNP in 1983 and a 6 percent increase in 1984. The 1984 figure would carry the likelihood of somewhat greater inflation, the senators acknowledge. But that is a price they are willing to pay to reduce unemployment more quickly "to at least a tolerable level," as Moynihan puts it.
Feldstein, however, argues that the recovery--except for the temporary rebound due to the inventory swing and the faster real growth due to any oil price drop--should proceed slowly enough that inflation is held in check.
He specifically rejects the Moynihan-Hart proposal that the Federal Reserve boost money growth to make current-dollar GNP achieve the 5.4 percent target for real growth. That prescription would require the Fed to accommodate whatever inflation rate might occur, since the difference between current-dollar GNP and real GNP is, by definition, inflation.
That approach was used in parts of the two sustained recoveries during the postwar period. In the first, during the 1960s, the inflation rate rose from close to zero to 6 percent, Feldstein notes. In the second, in the latter half of the 1970s, inflation went from 6 percent to 12 percent. "I don't want to repeat that," he says.
The drop in energy prices is not going to be sufficient to keep inflation at current low rates for long, according to most forecasters. The 3 percent or so the optimists see for 1983 gives way to 4 percent to 6 percent in 1984 and beyond.
For instance, Chase Econometrics, using the formulation of the consumer price index in use through December--it was changed beginning in January to reduce the impact of home-purchase costs and mortgage interest--says prices will rise hardly at all this quarter. The rate will then rise to nearly 6 percent by late next year, Chase says.
But in analyzing inflation, some economists also like to eliminate three volatile components of the CPI--mortgage interest rates, energy prices and food prices--and see what is happening to the remainder. Over the last 15 years, the CPI and the CPI less those items have sometimes moved in quite different ways, primarily as a result of various food and energy price shocks, but also when mortgage interest rates have risen as monetary policy tightened to fight inflation.
The Chase forecast abstracting from those volatile elements suggests that the underlying rate of inflation, the portion most sensitive to the rate of change in wages and unit labor costs, will still be running in the 5 percent to 6 percent range.