President Clinton painted a portrait this week of solid, if unspectacular, economic growth with declining interest rates this presidential election year.
“The American economy is healthy and strong,” Clinton said in his annual report on the condition of the economy, sent to Congress on Wednesday.
He said the economy is on track to grow at a 2.2 percent this year and 2.3 percent in 1997, as measured by the government’s new chain-weighted system for measuring the gross domestic product.
Since January 1993, when he took office, the economy has grown at an annual rate of about 2.6 percent amid declines in interest rates, unemployment and the rate of inflation.
Clinton and his economic advisers who assembled the 400-page report said the economy’s continued growth–and the avoidance of recession–this year don’t depend on dramatic interest-rate reductions by the Federal Reserve.
“Only modest accommodation from monetary policy” is needed for the economy to expand at a rate faster than last year.
Analysts expect 1995 GDP growth to be between 1.5 percent and 2 percent when final government figures are released.
Elsewhere, the report projects inflation as measured by the consumer price increase will rise to 3.1 percent this year and 2.9 percent a year later. That’s up from 2.5 percent in 1995, although the projection is based on no rise in the CPI’s core rate, which excludes food and energy costs.
The report also projects the unemployment rate will average 5.7 percent. The rate on three-month Treasury bills will average 4.9 percent and 10-year Treasury notes will average 5.6 percent this year, practically unchanged from the present.
The Fed cut the federal funds rate on overnight bank loans three times in the last seven months, lowering this benchmark borrowing rate to 5.25 percent from 6 percent last July. Fed governors also reduced the largely symbolic discount rate, charged on loans to member banks, by a quarter-point to 5 percent on Jan. 31.
Many analysts anticipate the Fed’s policymaking Open Market Committee will reduce the fed funds rate at least another quarter point at its next meeting on March 26. And there may be more cuts in the months ahead. Futures contracts on June Eurodollars, a gauge of investor expectations, have an implied interest rate of 4.78 percent today–almost a half point below the present fed funds rate.
The president’s report, based on information compiled by his Council of Economic Advisers, suggests the administration is also banking on rate cuts by forecasting the three-month T-bill rate will average 4.9 percent this year and 4.5 percent in 1997. T-bill rates typically anticipate interest rate actions by the Fed.
The president’s report includes no forecast on the yield on the benchmark 30-year Treasury bond, a proxy for investors’ outlook on inflation. Even so, Joseph Stiglitz, chairman of the Council of Economic Advisers, said the bond yield is likely to decline no matter what the Fed does because of the bipartisan commitment to balance the federal budget over the next seven years.
Though the president and Republican leaders in Congress continue to squabble over the budget in public, many investors expect the two sides to reach agreement on most, if not all, of the fiscal issues next month. House Speaker Newt Gingrich has said he expects an agreement in March.
Even if the two parties fail to come together on all fiscal issues in dispute, Stiglitz said bond rates should continue to decline because of deficit reductions agreed to already.
“It’s inconceivable to me that the last $100 billion (that remains to be resolved) will nix the first $500 billion they’ve agreed on,” he said.
Bond yields fell because investors are convinced that, one way or another, deficit reduction will be accomplished, Stiglitz said. “It doesn’t make any difference if (a balanced budget agreement) happens now or six months after the election,” he said. “The real question is what will the world look like in 1998 and 1999–that’s what they are concerned about.”
Separately, White House economists see little danger of recession in 1996. Stiglitz calls it “an unlikely event.”
So unlikely that Clinton forecasts a stable 5.7 percent unemployment rate for the end of this year and next, down just a tad from January’s weather-affected 5.8 percent rate. That means he expects enough new jobs to be created for the hundreds of thousands of new entrants into the labor force.
The president cited these major accomplishments in the report:
– Almost 8 million jobs created over the past three years.
– Decline of the so-called “misery index”–the sum of the inflation and unemployment rates–to its lowest level since 1968.
– Soaring private investment and record-setting new business incorporations to lay the foundation for higher economic growth in the future.
– Rapid growth in exports of U.S.-made goods, which create jobs for Americans.
This latest White House report strays little from the administration’s economic forecasts that formed the basis for the president’s $1.64 trillion budget for the fiscal year starting Oct. 1.
Stiglitz emphasized that economic expansions don’t have a natural life span. Therefore, he said, the current expansion–which has run for 59 months, or a little longer than the 50-month average expansion since the end of World War II–does not have to “die of old age.”
It isn’t the age of an expansion but rather rising inflation, rising interest rates and inventory overhangs that bring on recessions, Stiglitz said. Those maladies aren’t anywhere on the horizon, he said.
And even though consumer confidence has nosedived in recent months, Stiglitz doesn’t see that as a recession bellwether either. For one thing, he said the wealth effect from rising stock prices will encourage many consumers to spend.
Looking to the future, Stiglitz said that if the president’s policies–more spending for education, training and research and development than Republicans favor–the economy can grow faster over the long term than the 2 percent to 2.5 percent currently allowed by the Fed under Chairman Alan Greenspan.
“But you can’t just wish the economy to grow faster,” he said. “You have to put the right policies in place.”
