Economists Foresee Tough Times. Though they differ on the cause, they're all casting a beady eye on rising interest rates

WHAT will cause the next recession? Economists are beginning to speculate on that topic.

For example, Mickey D. Levy, chief economist at First Fidelity Bancorporation in Philadelphia, offers a modified ``monetarist'' explanation for his firm prediction of a ``sharp slowdown'' this spring. He also has a less solid forecast (``50 percent probability'') of a recession beginning between late 1989 and mid-1990.

Mr. Levy says the Federal Reserve System has been decidedly restrictive since mid-1988. Bank reserves have experienced no growth since July 1988. On a year-over-year basis, real (inflation-adjusted) measures of money - the fuel for the economy - have either been declining or are nearly approaching zero growth.

``These are the lowest rates of growth in the monetary aggregates since 1981 - immediately preceding a recessionary period,'' he notes.

Looking at nonfinancial economic variables, Levy sees further evidence of a coming slowdown. The growth in exports has declined. Capital spending dropped in the last quarter of 1988. Business isn't building inventories much because financing is expensive.

Moreover, he expects higher interest rates to discourage consumer spending soon.

Speaking of Fed policymakers, he warns: ``They must be very careful at this point. They are trying to fine-tune the economy ... failing to recognize the lags. They have made mistakes in the past.'' Tighter money usually takes six months or longer to affect business activity.

But Levy doesn't expect as severe a recession as in 1981-82. That's because inflation isn't as bad today as then. Nor are business inventories as burdensome. Thus the Fed has more flexibility to reverse its monetary direction quickly.

``A recession is in the cards,'' says A. Gary Shilling, an economic consultant. But he's cautious about saying exactly when (``this year and perhaps sooner rather than later''), because of a new phenomenon in the economy. That factor is the growing number of variable-rate mortgages and home equity loans tied to short-term interest rates. Also, some 10 percent of credit card and other consumer installment loans are based on floating rates. So are most bank loans to business.

With interest rates rising, many householders are making larger payments on their various debts. But because this is a ``brand new'' element, Mr. Shilling is not sure when it will bite into consumer spending hard enough to kill the economic expansion.

Contrariwise, David Rolley, a senior economist at Drexel Burnham Lambert Inc., figures there is not enough floating-rate debt outstanding yet to do that dastardly deed.

His calculations show that householders owe $80 billion to $100 billion in home equity loans and $500 billion in variable-rate mortgages (about one-quarter of the total home mortgages). A 2 percent jump in interest rates would boost annual interest charges about $12 billion.

At the same time, though, higher interest rates will add $50 billion to $60 billion to the interest income of individuals. And installment loan rollover and repricing, for various reasons, won't be a major source of higher interest expense to households, Mr. Rolley says.

Such figures, he continues, tend to get lost in a $4 trillion economy like that of the United States. Moreover, consumer sentiment surveys so far show no sign that Americans are about to slow their spending sharply.

Nonetheless, the brokerage house economist does expect a recession, but not before 1990. He forecasts that inflation will continue to accelerate over the next two quarters, that the Fed will react with additional tightening measures, that this will result in higher long-term interest rates, and that these high rates will prompt a slump.

One way or another, these economists see harder times ahead.