The nation`s economy will enjoy a seventh straight year of growth in 1989 unless the Federal Reserve Board follows a tight-money policy that leads to a recession, three forecasters said Thursday.
At the annual forecast luncheon sponsored by the University of Chicago`s Graduate School of Business, the three experts were in close agreement with their predictions for the gross national product next year.
Walter Fackler, professor of business economics, put ”real” GNP growth at 2.4 percent for 1989 after adjustment for inflation. Yale Brozen, professor emeritus, saw the GNP rising 2 percent. Joel Stern, managing partner of Stern Stewart & Co., a New York investment consulting firm, predicted 2.5 percent.
Their forecasts, however, called for slower GNP growth than the 3.8 to 4 percent increase expected for 1988.
Brozen saw a 50 percent chance of a recession in late 1989, and Stern put the odds at 45 percent, adding that a downturn for one quarter was likely.
Fackler was more optimistic, saying the chance of a recession was 30 percent.
”A recession would be more sure if Alan Greenspan (chairman of the Federal Reserve) continues on a collision course with more monetary restraint to defend the dollar or to fight a nonexistent threat of inflation,” Fackler said in a press conference before the luncheon.
Brozen pointed out that the U.S. money supply hasn`t risen since July, and he warned that the likelihood of a recession before the end of 1989 would increase if the Fed ”stays on the current track” for another 4 to 5 months. Even if there is a recession, it would be shortlived and relatively mild, the three panelists said.
Stern said he was more concerned about how the financial markets will react to uncertainties from threats of tax increases and higher interest rates.
”I expect very wide swings in interest rates, stock prices and foreign exchange rates,” Stern said.
He predicted the Dow Jones industrial average would swing between 1450 to 1550 and 2250.
”If a sharp drop in stocks happens, it will happen real soon,” Stern added.
Until the outlook for government policies becomes clearer, Stern said he would invest in gold, medium- to short-term quality bonds and real estate.
The panelists also expressed concern about how the federal government will attack the savings and loan industry crisis. They agreed that any bailout probably will be attempted apart from the federal budget. Brozen said, for example, that the Federal Savings and Loan Insurance Corp. might be given authority to issue bonds guaranteed by the U.S. Treasury.
”Even if they go off-budget, they still will have to borrow and that will have an impact on the capital markets,” said Fackler. ”It`s deceitful. The taxpayers will still wind up paying for it.”
Fackler said President-elect George Bush will ”inherit an economy that is basically in pretty good shape. There`s a great deal of momentum, no imbalances in inventories or demand and no capital goods boom.”
But Fackler said he is ”not enthralled” with Bush`s Cabinet appointments. He said former Treasury Secretary James Baker III, who has been picked for secretary of state, has been ”a disaster for the economy and created much of the nervousness that has affected the foreign currency markets. He`s made a lot of stupid statements.
”I don`t think much of (Richard) Darman either,” he said, referring to the former deputy Treasury secretary whom Bush has nominated to be budget director.
”And I don`t have any confidence in (Nicholas) Brady as the new Treasury secretary, based on the Brady Commission report,” he added. The report recommended several new regulations for the financial markets in the wake of the Oct. 19, 1987, crash.
”There`s no question that the reaction in the foreign exchange market reflected the appointment of Baker,” Brozen said.
Stern said the response of his two fellow panelists was typical of the
”free-market attitude at the University of Chicago.”
”Of course Baker would be an anathema to them,” he said.
