Nearly two weeks after Black Monday, economists are reining in their worst fears that a deep recession, even a depression, might result from the stock market crash.
If the United States is lucky, they said, the economy might avoid a recession altogether in 1988, although it will most certainly skirt dangerously close to one. A depression is seen by most analysts as out of the question.
This may be one of the few times in U.S. history when a prediction of a slowing economy is seen as upbeat.
One reason economists are more sanguine is that economic policy appears to be responding better than they might have suspected on Oct. 19, when the stock market plunged 508 points.
The Federal Reserve Board has pushed interest rates down sharply, while the U.S. and other major industrial countries are permitting the dollar to fall-both welcome developments in the eyes of economists.
They are also encouraged by the fact that the White House and Congress are working on a compromise to cut the budget deficit. They view this as an important symbol to nervous financial markets.
”We`re not inclined to run the recession flag up the flagpole,” said Steve Roach, economist for Morgan Stanley & Co., a large Wall Street investment banking firm.
”There`s a better than 50-50 chance we will avoid a recession,” said Marvin Kosters, economist at the American Enterprise Institute. ”But the probability has increased.”
John Knapp, economist for the Securities Association of Iowa in Cedar Rapids, said that instead of recession, he sees a strong economy in 1988 because of the Federal Reserve`s efforts to keep interest rates low.
”You don`t have any of the normal excesses, such as too much inventory, to create a normal bust,” said Roger Brinner, economist at Data Resources Inc. of Lexington, Mass.
Few analysts seriously entertained the danger of another Great Depression, chiefly because the underlying economy was strong when the stock market crashed. In addition, many safeguards have been built into the nation`s economic system.
A recession was another matter. The stock market`s decline since its August peak has wiped out roughly $1 trillion in stock values, enough to slow consumer spending significantly over the next few months.
Economists believe the destruction of these assets will be enough to slash consumer spending by $40 billion to $50 billion. That could cut economic growth in 1988 by more than a full percentage point, they say.
A recession is informally defined as two consecutive quarterly declines in the gross national product, the nation`s output of goods and services. More broadly, it is a contraction in business and consumer activity resulting in higher unemployment and lower production, profits and income.
What most economists now see is an economy rising at the meager rate of 1 to 1.5 percent in inflation-adjusted terms in 1988. That`s about half the growth they were predicting before the stock market plunged.
While it isn`t robust, it will be enough to keep the economy afloat. According to some economists, it`s just what`s needed. With American consumers having less to spend, they will be less apt to snap up imported cars and videocassette recorders. Also, a lower dollar will raise import prices, further dulling their appetite for imported goods.
David Jones, chief economist for Aubrey G. Lanston & Co., a government securities dealer, said the cheaper dollar will bring badly needed help to America`s depressed heartland in that it will bring life back to manufactured U.S. exports.
”What is going to happen is that the worker who is laid off on Wall Street is going to be moving to Cleveland,” he said wryly.
Agriculture will also benefit from the lower dollar and lower interest rates, he added. Even before these developments, he said, the farm crisis was already showing signs of easing.
Brinner said his forecast would be more pessimistic were it not for his belief that foreign governments will follow the lead of the U.S. in lowering interest rates. This flush of new money worldwide should help offset the bad effects of the market crash, he said.
Barry Bosworth, economist for the Brookings Institution, said he sees no recession on the horizon. He said the trade deficit will improve, as will other indicators, with lower interest rates and a lower dollar. While a drop in consumer spending may cause a temporary slowdown, he said, the long-run economic problem ”is still an economy living beyond its means.”
Economists emphasized that their current outlook could be tripped up if the stock market goes into another sharp decline. But they doubted that this would happen, with economic policy shifted toward easier money and a declining dollar.
Kosters, of the American Enterprise Institute, said he favored moves by the U.S. and other industrial countries to let the dollar fall to a more sustainable level.
But he said the U.S. will be making a major mistake if it tries to arrange another deal with its trading partners, chiefly Japan and West Germany, to peg the dollar`s value at a certain rate.
”The dollar should fall to where it wants to be,” Kosters said. Trying to hold the dollar`s value at an artificially high level will frighten off foreign investors, he said, because they know the value can`t be sustained.
The Treasury Department, however, hopes to arrange another agreement on the value of the dollar. This would come after the administration reaches a deal with Congress over cutting the budget deficit and after it extracts pledges from West Germany and Japan to lower interest rates or cut taxes.
Any such agreement will likely endorse a lower value of the dollar, economists said.
No matter what happens over the next year, the economy will still rely on heavy foreign borrowing. This is because it will take several years to turn around a $168 billion trade deficit. To finance this deficit, the U.S. imports capital from overseas.
If this money should dry up in any significant way through policy mistakes by governments or another crisis of confidence, it would change the current outlook significantly. Domestic interest rates would rise, and that could tip the economy into a deep recession.
Now, though, few economists believe this will be the outcome. What provides this hope is the speedy reaction of policymakers in the current crisis. There is also the lesson of the policy mistakes of the 1930s, when tight money, a banking collapse and protectionism caused the Great Depression.
