Economy still charted for a 'soft landing'

July 03, 1995|By Chicago Tribune

As mounting evidence of a weaker U.S. economy has streamed across economists' computer screens in recent weeks, the word "recession" has passed many lips.

Federal Reserve Board Chairman Alan Greenspan even gave gloom-and-doomers a boost recently. At a black-tie dinner in New York City, he told his audience the nation was now at increased risk of a "modest, near-term recession."

Yet despite all the recession talk, which conjures up painful and scary memories of unemployment, bankruptcies and foreclosures, many economists say that dreaded economic event still isn't showing up on their radar screens.

If anything, though it has hit the equivalent of the runner's wall, the economy still seems to have its legs under it, economists say.

Barring surprises, the economy is still poised this year to achieve an economic "soft landing," many economists believe. The term describes a fast-growing economy intentionally slowed by an inflation-worried Fed to a lower growth rate without falling off the deep end into recession.

Thus, many economists expect Fed officials will leave well enough alone and decline to cut short-term interest rates at the meeting this week of their Federal Open Market Committee.

Still, the Fed could wind up surprising those same experts by cutting rates at the meeting Wednesday and Thursday. Such a move could be dictated, for instance, if the June employment situation worsens from May's. The economy lost 101,000 jobs then -- a number that genuinely astonished many economists.

Two Fed officials -- Clinton administration appointees Alan Blinder, the vice chairman, and Janet Yellen, a University of California at Berkeley economist -- are known to be less hawkish on inflation than Mr. Greenspan. They have indicated a willingness to tolerate higher inflation if cutting rates meant raising employment.

"Of one thing I am certain," Mr. Greenspan said in New York. The meeting "will be most engaging."

The Fed raised interest rates seven times since February 1994 to restrain an economy that expanded last year by 4.1 percent, a rate Mr. Greenspan described recently to a Senate committee as "frenetic." Many economists believe the Fed was successful.

Of course, the sanguine expectations of good times ahead could be --ed in a moment, economists said. Though fundamentally sound, in its currently less-than-robust state the economy is certainly more vulnerable to the vagaries of current events.

A war or other unforeseen calamity could douse consumer and corporate confidence alike and plunge the country into a deep recession. A recession is defined as a downturn for at least two consecutive quarters in the gross domestic product, the total of goods and services produced in the nation.

Economists, like weather forecasters, are also the first to concede that even in the best of times, their forecasts are hardly perfect, economics being far from an exact science.

But economists take heart from some positive signs that indicate the current economic lull is only temporary. The latest came on Friday. The Commerce Department reported that May factory orders for big-ticket, durable goods rose 2.5 percent, the first rise in four months.

Consumer confidence remains high, even if it did drop recently. Rates on 30-year mortgages are low. The stock market is bullish and bank balance sheets are strong, which is true for many of their corporate borrowers, too.

"Don't lose the forest for the trees," said Diane Swonk, chief deputy economist at First Chicago Corp. "Right now, we've got a lot of trees that are showing weakness, but they're not representing the entire forest.

"The bigger picture is that we are very well set up for a rebound and there are some early signs that we could have some sort of a rebound already occurring, at least in the consumer sector, which is two-thirds of the economy."

Consumer confidence for June as measured by the University of Michigan Index of Consumer Sentiment is still relatively high at 92.3. Economists begin to worry greatly when that number falls below 80.

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