As economy loses altitude, can Fed make soft landing?

SUNDAY OUTLOOK

June 11, 1995|By Kevin L. McQuaid and Jay Hancock

Recent reports of a surging loss of jobs in May combined with higher-than- average claims for unemployment assistance and dropping home sales have led many analysts to question whether the Federal Reserve Board's attempt to orchestrate a "soft landing" of the economy is succeeding. Some economists say the economy is in a "hard landing" that easily could slip into a recession. Last week Fed Chairman Alan Greenspan defended the board's actions, saying he doesn't believe a recession is on the horizon despite the "quite pronounced" slowdown.

Is the economy still capable of maintaining a "soft landing," or is the downturn more significant and the threat of a near-term recession magnified?

James E. Annable

Chief economist, First National Bank of Chicago

I think the answer is no, but the answer is no in a surprising way. I think economic growth is going to rebound very significantly in the second half of the year.

A soft landing is always the least likely outcome. As the Federal Reserve defines it, it is growth, but not enough growth to put upward pressure on prices. It's pretty tricky and the Fed is working with tools that have tremendous time lags. In some sense they're steering a car, trying to hit a very narrow path, and steering by looking in the rear-view mirror. It's much more likely that their efforts to slow the economy are inadequate.

We believe the components of a . . . rebound for the second half are already in place. We have worked off surplus inventories in this economy very, very quickly in this quarter. When you do that, you really set up for a rebound. . . .

David H. Resler

Chief economist, Nomura Securities International

Contrary to the esteemed judgment of the Federal Reserve Board chairman, I think we may already be in a recession. And while I don't think it's too late to extricate ourselves, we are in the jaws of a contraction, and it will take a good bit of luck and good fortune to get out. As evidence of the point, I expect this week that there'll be a report on the drop in industrial production, the third consecutive decline. That's important because 80 percent of the time that we've seen three consecutive declines, it's been in a recession. Based on the employment report, one could draw the same conclusion. We've experienced back-to-back declines only a few times in history, mostly when we've been in the throes of a recession. We've also had three straight declines in the index of leading indicators, and the future holds slow growth in that arena at best. So the sanguine view that things have worked out for the best hasn't held against the evidence. Using the airplane analogy, I'd say rather than a soft landing that we've begun to lose altitude at a rapid rate.

Allen Sinai

Chief economist, Lehman Bros.

I think ultimately the economy will be in the soft landing range of between 2 and 3 percent growth, balancing both the supply and demand side of the economy. At present, though, the economy is experiencing a growth rate of just 1 percent, which equates to a hard landing rather than soft. . . . Given the momentum, sustained lower rates are necessary. I don't think the Fed has reached that conclusion yet, however. There appears to be some overshoot and, therefore, a midcourse correction is needed. I also see a diminishing of the consumer economy looking out short-term, which would be a ripple effect of the slide. My expectation is that we'll be back at between 2 percent and 3 percent growth by the fourth quarter of this year, as consumers return to trend spending. However, I've upped the odds of recession this year to 20 percent.

Alfred G. Smith III

Chief economist, NationsBank

I believe the second quarter will be slow in terms of growth. In fact, my estimation is for zero growth in the second quarter. While the second half of the year should prove faster, I think the economy will perform well below its capabilities. The real negative numbers in my mind were the employment figures for May, which showed jobs were down by 100,000. That could prove harmful in the months to come as well, although I think the numbers may have been artificially depressed because of seasonal jobs. However, I do believe that will turn around later in the year and we'll see improvement.

. . . But the soft landing also will be hampered by consumer growth, where I see the pent-up demand of a year ago as largely having been spent, because one of the driving forces then was the phenomenon of buying on credit, which typically drops when employment rates fall and with it consumer confidence. On the good side, inflationary pressures appear to have peaked and are slowing, and will continue to come down. . . . My expectation is that things are going to get better, and that the soft landing will eventually translate into a slight upswing.

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