Slowing ahead, Fed official says Deceleration likely but not a recession, Broaddus tells analysts

Don't spend the surplus

October 22, 1998|By Bill Atkinson | Bill Atkinson,SUN STAFF

The U.S. economy is likely to slow down in the fourth quarter and into next year, but it should not slip into recession in the next 18 months, the top official at the Federal Reserve Bank of Richmond said yesterday.

J. Alfred Broaddus Jr., president of the Federal Reserve Bank of Richmond, Va., said the case for a slowing economy is "more compelling now" with the world's economic problems hitting U.S. shores.

"The consensus forecast is clearly slowing of growth in the second half," Broaddus told members of the Baltimore Security Analysts Society at a luncheon at the Renaissance Harborplace Hotel. "There are good reasons to expect the U.S. economy to decelerate."

Economists estimate that the U.S. economy, which grew about 3.5 percent in the first half of the year, will slow to about 2.5 percent in the second half of the year, and fall below 2 percent in 1999. It has been expanding for the past 7 1/2 years, the third-longest expansion in U.S. history.

But Broaddus said there is a possibility that the "economy will not slow as much as the consensus is predicting," because inflation, interest rates and unemployment are low.

"The economy is still at a very high level," he said.

When asked if the country is likely to fall into recession, he said, "I don't think we are going to have a recession in the next 18 months. Is it impossible? No."

Although the economy is growing, there are signs of weakness, he said. The trade deficit is up, industrial production is flagging, housing permits are down and banks are tightening up on lending money.

"I don't think we are having a credit crunch now -- that is certainly a risk," he said.

The slowdown has been spurred in part by recession in Japan and problems in other Asian countries, Russia and Latin America, which has cut demand for U.S. exports, Broaddus said. Businesses are having difficulty raising capital in the public markets and profits are being squeezed.

In addition, he said, sharp declines in the U.S. stock market have "reduced household confidence," and threatens to crimp consumer spending -- a key driver of the economy.

The Dow Jones industrial average, the closely watched index of 30 blue-chip stocks, has swung wildly in recent months, falling nearly 20 percent Aug. 31 to 7,539 points, from a July 17 high of 9,331.97.

Broaddus said the sense of "risk" is high. "It is already having a chilling effect on the markets."

He characterized current economic conditions as "unusual" and "turbulent."

He said several steps can be taken to strengthen the economy. A key one is for Japan to fix its troubled banking system so companies there can get loans and expand their businesses.

He also said the surplus of the federal government should not be spent. A balanced budget increases "financial market confidence" and consumer confidence.

"By definition, the surplus reduces the public debt. That's enough. I don't think we have to do anything else with the surplus," he said.

Pub Date: 10/22/98

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