Held back by debt accumulated during the 1980s, the economy will recover slowly next year, but will not return to its normal level until after the middle of the year, according to an economist for T. Rowe Price Associates Inc.
"Consumers are cautious, business people are nervous, and the federal government is not helping out," said Paul W. Boltz, vice president and financial economist for Price, the Baltimore-based mutual-fund and investment services firm.
His prediction was in prepared remarks to be delivered today in New York at Price's annual news briefing and luncheon.
"The reason for caution among consumers and business people is not hard to find," Boltz said.
"After the extraordinary borrowing binge of the 1980s, the debt burden has finally become so large that it is restraining the mighty engine of growth," he said.
This debt and the consumer pessimism has spurred increased savings. But this savings means less national income because of the "paradox of thrift," Boltz said.
"If everyone simultaneously tries to save more, national
income will fall because one person's spending becomes somebody else's income," he said. The economy is also hurt by declining consumer confidence.
"The pessimism is apparently deepening," Boltz said. "We believe the sluggish recovery will feel much like a recession through mid-1992," he said. "Nonetheless, we think that consumers will gradually emerge from the gloom, as they always do, and the economy will resume more normal growth in the second half of the next year."
During the first half of the year, the gross national product will probably grow at a rate of no more than 2 to 2 1/2 percent, Boltz said. "By the second half, we think consumer sentiment will be sufficiently robust to encourage a modest strengthening in spending, helping nudge GNP growth up to 3 percent or so," he said.
A bright spot in the economy is the drop in inflation. The consumer price index has dropped from 6 percent last year to 3 percent so far this year, Boltz said. Unless the recovery is much weaker than he anticipates, inflation should be in the area of 3 1/2 to 4 percent, he said.
Last year at Price's news conference, Boltz downplayed the effects of debt on consumers, businesses and government.
"We do not foresee bankruptcies sweeping through the business sector, an outcome some believe is predetermined by excessive borrowing during the 1980s," he said a year ago.
At that time he said borrowing was not not 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.