Economist predicts 'milder' recession T. Rowe Price vice president takes upbeat view

December 04, 1990|By Ross Hetrick | Ross Hetrick,Evening Sun Staff

Taking a somewhat upbeat view of the downturn in the economy, an economist for T. Rowe Price Associates Inc. is predicting a mild to moderate recession, lasting six to nine months with the unemployment rate not going over 7 percent.

"We do not foresee bankruptcies sweeping through the business sector, an outcome some believe is predetermined by excessive borrowing during the 1980s," said Paul W. Boltz, vice president and financial economist for Price, the Baltimore-based mutual funds and investment services firm.

Boltz's prediction was in prepared remarks to be delivered today in New York at Price's annual press briefing and luncheon.

Despite the large increase in corporate and personal debt, Boltz said, the pace of borrowing was not noticeably out of line with earlier decades. "In the aggregate, businesses and households should be able to manage their debt service as they have during other postwar recessions," he said.

Much of the consumer debt is largely reflected in the purchase of "bigger and better homes," and corporate debt "always tends to rise as a share of GNP during expansions," Boltz said.

"The big borrower of the 1980s was the federal government, and we do not expect a bankruptcy there," he said in the remarks.

However, Boltz said the economy could have been plunged into "another Great Depression" if the federal government had not picked up the massive losses of the thrift industry. "With little debate on whether the bailout should proceed, Congress wisely decided not to repeat one of the key errors of the 1930s: letting the banking system go bust," Boltz said.

Even though there is a downturn in consumer confidence and real income growth has slowed and will probably soon turn negative, he said the "classic ingredients" for a severe recession are missing. "Business inventories are not critically out of line with sales, the unsold stock of new houses is not awesome, the Federal Reserve is not tightening credit and the dollar is weak," Boltz said.

Another favorable factor is that some countries remain healthy. "Japan and Germany will continue to enjoy positive economic growth in 1991, albeit slower than this year as adjustments are made to higher energy prices," he said.

Last year Boltz had predicted a slower economy, but no recession in 1990. This forecast seemed to be coming true earlier although growth was slowing "We were achieving the fabled "soft landing."Boltz said.Then the Gulf crisis erupted in August."The economy got clobbered by Iraq's invasion of Kuwait,"he said.

The invasion delivered an acute blow to oil markets and to business and consumer confidence," Boltz said. "Now, as we near the end of 1990, the question of the hour is not whether there will be a slowdown, but rather how severe it will be."

Boltz warned that his new prediction could be blown off course again if there is another shock similar to Iraq's invasion of Kuwait. "A long shooting war in the Middle East, another surge in oil prices, an unwillingness of foreign investors to finance the U.S. current account deficit, or the collapse of a major bank here or in Japan comes to mind," he said.

"But weighing these possibilities, we still think the recession will not become an uncontrollable downward spiral," Boltz said.

Despite the expected downturn in the economy, stocks and bonds, particularly those in mutual funds, are still a good, long-term investment, said George J. Collins, president and chief executive officer of Price.

"While investors should not count on a quick market recovery to recoup recent losses, those with a long-term investment horizon should stick with their plans," Collins said in his prepared remarks. "Experience teaches us that investors with a diversified, long-term strategy do better over time than those who try to restructure their portfolio every time the wind blows from a different direction."

To illustrate the point, he said investors holding securities for only one year during the last 64 years had a 30 percent chance of losing money, based on the Standard & Poor's index of 500 stocks. But these odds are reduced to less than 4 percent if the stocks were held for a 10-year period. Held for a 20- to 25-year period, there was no chance for a loss, Collins said.

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