NEW YORK -- 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.
While the economy was in the doldrums, mutual funds have prospered. "This has been an exceptionally strong year for the fund industry," said Price chairman George Collins.
Total mutual fund assets increased nationally to $1.3 trillion and sales were the best since 1986, Collins said. "Our experience at T. Rowe Price has reflected the industry," he said.
The growth in funds has been particularly spurred by increasing retirement accounts, which amount to 45 percent of the assets in Price's funds.
But despite the performance of mutual funds, the economy in general has been dismal because of the caution of businesses and consumers, Boltz said.
His prediction came 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.
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.
At that time he said borrowing was not not out of line with earlier decades.
In bond funds, investors this year were rewarded if they were willing to buy long-term bonds of lower quality, according to Edward A. Taber 3rd, the director of Price's taxable bond division.
"Investors have been rewarded for taking risks," he said.
This was particularly true in the high-yield bond fund, which invests in low quality issues known as "junk" bonds.
After experiencing a "horrible" year in 1990, this high-yield fund came back with a 28.1 percent total return so far this year, said Richard S. Swingle, the president of Price's high-yield fund. Since its founding at the end of 1984, the high-yield fund has had an average annual rate of return of 10.05 percent.