Offical Washington is uneasy about the future of the economy, as evidenced by the Federal Reserve Board's haste to cut the discount rate -- the price it charges for loans to banks -- from 8 percent to 7.5 percent. That's the lowest rate in almost seven years.
A weak economy could exacerbate the budget deficit, and partially offset congressional efforts to reduce the red ink. It could also diminish the chances for tax reform, already clouded by the administration's efforts to protect certain loopholes for business.
Fed Vice Chairman Preston Martin, who is closely in tune with the Reagan administration (he may some day succeed Paul A. Volcker), has been talking with increasing conviction about the possibility of a "growth recession." That seeming contradictory term implies an economy painfully grinding out real gains -- say, 2 percent to 2.5 percent real growth -- that are not enough to cut into unemployment.
That grim possibility looks ever more likely in the wake of the downward revision this week of the first-quarter Gross National Product growth figure to 0.7 percent, the lowest since the end of the 1982 recession. Originally estimated at 1.3 percent, the final report on the first quarter some weeks hence could be even lower.
But at 0.7 percent, the average growth for the past three quarters stands at a rate of only 2.2 percent, compared to 7.1 percent over the prior 18-month period. Thus, we appear to have already drifted into the "growth recession" scenario laid out by Martin, and the dilemma for policy makers is how to get out of it without regenerating inflation.
For the past several weeks, the Fed has been less sanguine than many private economists, who have been predicting a pickup in activity in the current quarter and later in the year. Actually, there is little in view -- outside of a prod by the Fed -- likely to provide that necessary upward jolt.
The troubles in the nation's thrift institutions have also encouraged the Fed to loosen the monetary strings. Despite the central bank's historical concern over regenerating inflation, it worries even more about a financial panic that might be touched off if there are more TV pictures of hordes of depositors camped out in front of closed-down S&Ls.
Another sign of stagnation is that unemployment refused to go below the 7-plus mark, where it's been stuck for a year. Given the grim first-quarter result, it's easy to see the unemployment level moving to a range of 7.5 percent to 8 percent later this year.
It has been clear for some time that the industrial-manufacturing sector of the economy is in trouble, largely because of the import competition encouraged by a strong dollar. But this didn't register in the public consciousness until the earlier reported drop of the real growth rate to 1.3 percent in the first quarter from 4.3 percent in the fourth quarter of 1984.
The administration will soon have to admit that the chances have evaporated for 4 percent real growth for calendar 1985. All its budget projections had been based on that figure.
Not every analyst agrees that the current slump is traceable to import competition and the high dollar. Lawrence A. Kudlow, a former economic adviser to Budget Director David Stockman, traces current troubles to the Fed's tight-money policy from mid-1983 to the autumn of 1984. He sees an "economic boomlet" later this year triggered by easier money, followed by a 1986 recession.
If the economy continues to stumble in 1985, it will complicate things on Capitol Hill, where Congress is struggling to pass a meaningful reduction in the budget deficit. A "growth recession" scenario would at least partally wipe out the painfully won savings from budget cuts, because Treasury receipts would fall off and expenditures for unemployment compensation would rise.
Sen. Robert Dole (R-Kan.), always a candid man, told reporters that he could visualize a scenario in which Congress passes what it thinks is a good deficit-reduction bill this year, only to wake up early in 1986 and find that the net savings are a lot less than its own numbers people have been saying.
"Maybe we won't be at that last-resort stage (where Reagan would be pushed into a tax increase), but the deficit could still be a difficult problem," he said. The majority leader broadly hinted that there were circumstances where he and other Republicans could accept a minimum tax on corporations, as suggested by some Democrats, that might raise $20 billion to $25 billion a year.
In Dole's view, the crowded congressional calendar makes it unlikely that tax reform can be passed this year, even with a strong push from Reagan. That could prove the end of tax reform. If Congress, at the beginning of 1986, is struggling to manage a growth recession and a still unwieldy budget deficit, the hopes for tax reform, which flamed brightly last November, will have burned out.