Clinton set to 'luck out' on economy Signs are pointing to solid recovery, economists assert

November 22, 1992|By Gilbert A. Lewthwaite | Gilbert A. Lewthwaite,Washington Bureau

WASHINGTON -- President-elect Bill Clinton appears set t "luck out" on the economy, with prolonged recession and tentative recovery giving way to slow but solid expansion, according to economists.

"There is no question the cycle will serve him," said David Berson of the Federal National Mortgage Association, voicing the increasing consensus among economists.

Allen Sinai of the Boston Company Economic Advisers Inc. told his clients this week, "The quickening of the pulse beat in economic activity this time probably is the real thing."

From Michael Sherman of Shearson Lehman Bros. of New York came this word: "The economic signs seem unmistakable -- the economy is accelerating."

A strengthening economy could spare Mr. Clinton the political and economic pain of having to make the sort of major, stimulative increase in the deficit next year that would open him to "big spender" charges from Republicans, alarm the Federal Reserve Board and spook the financial markets.

Lawrence A. Kudlow, associate director of the Office of Management and Budget under President Ronald Reagan, told a Republican Party brainstorming session Wednesday that the primary economic indicators were now so strong that Mr. Clinton would not need major stimulants in his package.

Robert Reich, the Harvard professor who heads the Clinton economic transition team, said last week that no decisions had been made on the new administration's program. The transition team hopes to present Mr. Clinton with a series of options, based on the latest economic data, by the middle of next month.

The bases for the current outburst of optimism among economists are:

* Increasing retail sales, setting an encouraging trend for the Christmas season, the most important retail period of the year.

* Continuing reduction of personal and corporate debt, hastening the day when individuals and companies will feel less financially strained.

* Progress in the basic restructuring of U.S. industry, which is now leaner and more competitive.

* A small initial increase in both money and credit growth, reflecting growing interest in spending and investment.

* A jump in consumer confidence that predated the election and is likely to be bolstered by the inauguration of a new administration focused on economic revival.

Of all these, consumer confidence is key. Consumer spending accounts for two-thirds of the nation's economic activity, and unlike most previous recessions, which were caused by lack of investment, the latest downturn was largely caused by lack of consumption.

The big damper on consumer confidence -- and consumption -- remains the job situation. There is no prospect of any dramatic improvement here, and the Labor Department announced last week that new claims for unemployment benefits, which had begun to fall over the previous six weeks, increased by 31,000 during the week that ended Nov. 7.

There was also negative news from the Commerce Department, which recorded a slip in construction starts on houses and apartments, reversing a late-summer bound. But the latest setbacks, typical of this hesitant recovery, are unlikely to counter the growing confidence that the economy has moved firmly into a cyclical expansionary phase.

"I think the best thing to do is just leave things on a status-quo basis," said Steve H. Hanke, professor of applied economics at the Johns Hopkins University and chief economist at currency traders Friedberg Commodity Management Inc. of Toronto.

"The economy is in a lot better shape than Clinton has claimed it to be," he said. "Just ride it out and claim victory -- that's what I would do. I said before the election anyone who was in there [the White House] in 1993 is going to look like a hero."

An accelerating recovery would raise its own danger: By the time any stimulative measures are approved by Congress and implemented, their impact could coincide with a vigorous economy, raising the specter of renewed inflation.

Paul W. Boltz, financial economist with T. Rowe Price Associates Inc. of Baltimore, told clients in his latest newsletter: "The economy could easily be very strong in 1994 and 1995, with interest rates and inflation rising, roughly matching the sequence of the [President Jimmy] Carter years that culminated in a recession in election-year 1980. And no president would want to see a repeat of the pattern of the Carter administration."

Mr. Boltz said, "The Clinton administration may find itself devoting its efforts to the appearance of action, rather than action itself, to buck up national sentiment without pushing up the deficit."

The question of how much Mr. Clinton should stimulate the economy is perhaps the most crucial of his first 100 days. One group of advisers urges him to cut the deficit immediately despite the drag on the economy; the other wants him to boost the economy even at the cost of increasing the deficit. At his first news conference since the election, Mr. Clinton called this "the major debating point."

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