Economy falls short of forecasts But administration sees low deficit, rates

September 02, 1993|By Gilbert A. Lewthwaite | Gilbert A. Lewthwaite,Washington Bureau

WASHINGTON -- The Clinton administration said yesterday that the economy was growing more slowly than projected, but this gloomy news was offset by the administration's prediction of increased deficit reduction and continuing low interest rates over the next five years.

In its midyear economic review, the administration predicted moderate but sustained expansion with long-term productivity and income gains, unthreatened by a new round of inflation.

"America is becoming the nation in which to invest, innovate, prosper and grow," the review said. "And the American people will reap the benefits in the form of jobs, income growth, and economic security."

The administration's reassessment of weaker short-term growth but stronger long-term prospects is expected to be confirmed next week by the Congressional Budget Office in a separate economic update. A CBO official said: "There are differences in some areas . . . but the directions are no different."

The administration's review was also basically in line with the expectations of private forecasters. But some of its rosier elements provoked mild skepticism from economists outside the government.

The new estimates, which factor in the effects of the recently passed budget, suggest that:

* The gross domestic product -- the sum of all goods and services produced in the United States -- will be 2 percent this year, compared with the 3.1 percent forecast when the administration presented its budget in April.

Next year's growth rate will be 3 percent, instead of the hoped for 3.3 percent. The long-term projection suggests a growth rate of around 2.6 percent or 2.7 percent between 1995 and 1998.

"The economy looks slightly weaker than it did last winter," the review said.

The downward revision was due primarily to a weaker-than-expected performance in the first half of the year, when the economy grew at an annual rate of only 1.3 percent. Behind the sluggish growth were weak consumer confidence and depressed demand for U.S. goods abroad, particularly in recession-racked Japan and Europe.

* The deficit this year will shrink to $259.4 billion, from the $305.3 billion projected in April, and by 1998 will drop from the $387.7 billion projected in April to $181 billion. This would enable President Clinton to fulfill his campaign pledge of halving the deficit as a percentage of gross domestic product, to 2.2 percent, from 4.6 percent.

"I'll believe it when I see it," said Paul W. Boltz, an economist with T. Rowe Price in Baltimore.

The administration attributed its lower projections to the passage of the deficit-reduction package, but lower interest payments on the national debt were also a factor.

* Unemployment will be steadily reduced to 5.5 percent in 1998, from 6.9 percent this year, as the economy expands, with the North American Free Trade Agreement -- about to be considered by Congress -- deemed by the administration to be a net plus for the domestic work force.

"What matters is not just the growth of the economy, but growth of jobs, what happens to the unemployment rate and what happens to people's incomes," said Laura D'Andrea Tyson, chairman of the White House Council of Economic Advisers.

She noted that job creation during the Clinton administration was averaging 165,000 new jobs a month, compared with 45,000 a month during the Bush administration.

* Interest rates will remain low because of the absence of inflationary pressures either here or abroad. The administration predicts that short-term rates will edge up to 4.5 percent in 1998, from 3.1 percent this year, as the economy recovers. Long-term rates are expected to move down to a steady 5.9 percent over the next five years, from 6 percent this year.

"I just don't buy it," said James Solloway, chief economist with Argus Research Corp, New York. "I think we are going to see higher long-term interest rates in the years ahead and that rates right now are very close to the bottom."

Asked why she was confident that rates would stay low for so long, Dr. Tyson, Mr. Clinton's top economic adviser, said: "What can we identify out there in the next five years that would cause significant upward movement in the interest rates? Nothing on the horizon suggests an uptick in inflationary pressure."

Stanley Collender, budget affairs director for Price Waterhouse in Washington, said that bond traders yesterday judged the administration's projections "pretty realistic."

Of the anticipation of five years of long-term interest-rate stability, he said: "It's a long time, that's for sure. There is the potential here for a surprise on the high side. There isn't any doubt about that. But you look out there and you say to yourself, 'What can come up?' "

There is likely to be further deficit reduction and lackluster economic activity abroad, Mr. Collender said, adding, "There are too many imponderables here, but, based on what I know now, it's pretty reasonable."

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