Stocks sag again over questions on recession

What's the shape of the recession -- short and mild or long and wild? Wall Street, undecided, sat back and watched last week to see how it develops.

President Carter, for his part, has decided that the recession, which he thinks has "probably" begun, will be short and mild. As Monte Gordon of the Dreyfus Corporation, a mutual fund, noted, however, "There are a lot of people on Wall Street who think there will be a good deal of pain associated with this recession." Some of these stepped away from the trading floor last week and the Dow Jones industrial average sank 28.15 points, closing at 763.40. Trading was very slow.

The market's downward move came while interest rates were falling. The prime rate, the interest rate that banks charge their best customers, was dropped to 19 1/2 percent on Friday by several of the country's leading banks. Analysts expected it to keep dropping over the next several weeks.

Of importance to many investors, Henry Kaufman, general partner and economist for Salomon Brothers, predicted that rates had peaked and "will decline irregularly." However, he added, "The fundamentals for a bond market rally of cyclical proportions . . . are not yet in place."

Still another uncertainity that kept investors on the sidelines last week was the fast-moving scenario involving Iran. Hildegard Zagorski, assistant vice-president of Bache Halsey Stuart Shields, Inc., doubts that this conflict will develop into a confrontation between the United States and the Soviet Union , but should it actually do so, it could cause the market to break sharply. Otherwise, she says, investors are mainly preoccupied with the depth and duration of the economic downturn.

To Citibank's economics department, the recession is likely to be more severe than the Carter administration is forecasting. The banks is predicting a decline in real gross national product (the total output of goods and services) of 2 1/2 percent over the next three quarters. Unemployment will rise to 8 percent by year-end, up from a current 6.2 percent. The bank concludes that "the most likely outcome will be a recession of greater severity than the mainline forecast presently calls for."

Mr. Kaufman of Salomon Brothers says he thinks it's still too early to predict te magnitude and duration of the economic contraction. Business spending for inventory and new plant and equipment, he notes, is still propping up the economy. Once it begins to falter, as housing and auto sales have, it will be easier to gauge how long and how far the economy will fall.

John J. McAuley, an economist at Chemical Bank, predicts that the recession will remain in the "moderate" category, but he figures the recovery will be slow and troublesome in 1981. He expects a 2 percent decline in real gross national product this year and a very small increase next year. It will be "average" as far as recessions go, he concludes.

Whatever the recession scenario, most of the economists and analysts are not optimistic about the inflation rate. Mr. Gordon says that as interest rates drop, it should take some pressure off the consumer price index. He expects the index to come down only from 18 percent to 15 percent at first, however. "It's like losing weight," he explains. "Initially, it's easy to shed a few pounds. But getting down under 10 or 11 percent in the inflation rate is going to be much more difficult."

Mrs. Zagorski is expecting the consumer price index to show a 1.3 percent increase for March when it is released this week.

First-quarter earnings started to rattle in for many corporations. The reports showed signs of the economic weakness. Among those reporting lower earnings were General Telephone & Electronics, Champion International, Citicorp, and Northrop. However, Merrill Lynch & Co. said its first-quarter net soared 78 percent.

It was a bad week for the auto stocks. The Detroit-based companies announced eight plant closings last week, including several permanent ones. Chrysler met with some 200 of its lenders in the hopes of finding anther way to bail out of its nearly desperate financial situation.