The Reagan administration yesterday issued an optimistic economic forecast for 1986 that will serve as the foundation for the new White House budget.
The administration forecast, which was released by the Council of Economic Advisers, says the economy will grow at a 4 percent rate next year, far above the actual 2.8 percent pace this year. The forecast predicts a higher inflation for the next two years and a slowly declining unemployment rate.
The administration's forecast for economic growth next year is 1 to 1.5 percentage points higher than predictions by many mainstream private economists. The administration's more upbeat forecast would tend to lessen the amount of budget cuts needed by the White House to reach the deficit-reduction targets mandated by the Gramm-Rudman-Hollings legislation approved by Congress earlier this month.
The new administration forecast also projected relatively healthy economic growth through 1991, the year Congress has set to balance the federal budget under the legislation.
Slower-than-anticipated growth in the economy would mean that the government may take in less money while being forced to spend more for unemployment and other benefit programs. This, in turn, would require deeper cuts in the budget to reach the deficit targets.
The administration also said it expects the U.S. balance of trade with the rest of the world to worsen before improving later next year. Short-term interest rates will rise but longer-term interest rates should decline in 1986, the administration said.
"I think it's optimistic," Beryl Sprinkel, chairman of the Council of Economic Advisers, said of the forecast. "I think it's realistically optimistic."
"I don't think it's an unusual forecast" compared with those of private forecasters, Sprinkel said. "It's one I feel very comfortable with."
However, Sprinkel said there are problems in agriculture, steel and some energy sectors of the economy. Some banks are having problems, too, because of loans made to problem Third World countries.
Sprinkel said he doesn't expect a recession next year or any major threats to the economy. "It's amazing. I sleep very well," Sprinkel said.
Yesterday, the Commerce Department reported that its index of leading economic indicators -- which attempts to predicts what will happen four to six months from now -- increased by 0.1 percent. Commerce Secretary Malcolm Baldrige said the leading indicators "point to moderate growth ahead."
The administration forecast assumes implementation of the Gramm-Rudman deficit reduction amendment as well as passage of a tax revision plan similar to the president's. The forecast also assumes that the Federal Reserve will reduce the growth in the money supply, which would tend to slow economic activity later on and reduce inflation, and that the value of the dollar will remain unchanged.
Sprinkel said that he and other administration officials based their forecast on accelerated growth in the money supply this year, which under monetarist economic theory suggests faster economic growth several months later.
Other factors were: increases during 10 of the past 11 months in the government's index of leading economic indicators, which gauges economic activity three to six months ahead; recent reductions in interest rates, an incentive for buying homes, cars and business equipment; low inventories on businesses' shelves that would need to be replenished, and an improvement in the foreign trade picture.
Sprinkel also said he expects business profits and productivity to increase, leading to higher business investment. Consumer spending should rise as Americans' incomes and assets increase.
Many private economists said they do not expect a strong rise in consumer spending, which accounts for about two-thirds of the nations output because consumer debt is at historically high levels and personal savings rates have been low.
Sprinkel, however, said that savings will improve and that many consumers use their credit cards as cash, rather than accruing finance charges that would have to be paid off. Additionally, he said, the fact that consumers are taking on credit shows they are optimistic about the economy.
Inflation is expected to rise from 2.9 percent in 1985 to 3.8 percent next year because of "rapid money growth in the past year" and the decline in the dollar, which would tend to make imports relatively expensive.
The administration projected that the total unemployment rate would decline from 7.1 percent this year to an average 5.6 percent by 1991, inflation would slowly decline to 2 percent after peaking in 1987 at 4.1 percent and inflation-adjusted GNP would drop to 3.5 percent after increasing at 4 percent through 1988. Short-term interest rates would rise from 7 percent to an average of 7.3 percent in 1986.