Economists at Odds Over Future Outlook After Dollar Hits Postwar Low Against Yen

FEDERAL Reserve Board Chairman Alan Greenspan described the United States economy this week as ``the brightest in decades.'' But many observers who were listening carefully to the chief banker's every word say what they heard is that the horizon is far from clear.

``Having paid so large a price in reversing inflation processes to date, it is crucial that we do not allow them to reemerge,'' Mr. Greenspan testified before the House Budget Committee on Wednesday. Referring to the financial market's continued skittishness over the nation's economy, Greenspan told lawmakers: ``The job [of calming Wall Street's fears] is not yet complete.''

Indeed, in the international currency markets, the US dollar was pounded to new lows this week. Jittery financial traders - moved by what they perceive as negative news about the US economy, such as a widening trade deficit - have been dumping dollars into the markets.

While US exporters are buoyed by a weak US currency because their output is cheaper and, thus more competitive, in overseas markets, a lower dollar pushes up the price of imports for American consumers and increases prospects for more domestic inflation.

In the past several months, the Fed has moved to prevent a revival of inflation with four interest-rate hikes. The maneuvers are intended to slow economic growth by increasing the cost of borrowing for individuals and commercial enterprises. White House economic advisers who watched a rebound from slow growth that was bolstered by low interest rates are troubled by the Fed's increases.

``Business is concerned, because the financial markets are so worried about inflation, interest rates keep rising, and the cost of capital goes up,'' says Ken Goldstein, an economist with the New York-based Conference Board, which produces a closely watched consumer-confidence index.

Immediately after Greenspan's testimony, Treasury Secretary Lloyd Bentsen said he was ``very confident in the outlook [for the US economy]. We are now in the midst of the first investment-led recovery from a low-inflation base in 30 years.''

But Mr. Goldstein asserts that all of that is in jeopardy. ``We're 3-1/2 years into downsizing [of the work force], which is only the first phase of corporate restructuring,'' he says. ``Capital investment is the next phase. It's essential to invest in the people who have been left on the payrolls and make equipment upgrades to get work done by the downsized work force.''

The Fed is running the risk of making the cost of capital too expensive and snuffing out the business expansion and employment creation needed to maintain a robust economy, Goldstein says. Job growth is necessary for consumer confidence, which fuels roughly two-thirds of economic activity, he adds.

This month, the US Chamber of Commerce warned that the Fed's tightening of monetary policy and the markets' reaction to it have increased the risk of recession next year.

``We have higher taxes, more regulation, the threat of massive government intervention in the health-care system, interest rates near the levels they were before Clinton took office, and only near-term improvements in the deficit numbers,'' says Martin Regalia, the Cham-ber's chief economist . ``This puts both the Clinton administration and the American business community in a bind.''

In a major move to secure the US dollar from further erosion last month, US Treasury officials organized a program with 16 other nations to buy US dollars. But again this month, the dollar has been under siege by currency traders.

In coming days, Greenspan and Mr. Bentsen may opt to intervene to prop up the greenback. But if their efforts fail, the Fed will have to decide whether to allow the dollar to fall further or to tighten monetary policy. Higher rates would strengthen the US currency but cut into economic growth.

After weeks of watching the dollar slip, Bentsen said this week: ``I am concerned by recent movements in the exchange markets. We are carefully monitoring developments. We continue to be in close communication with our [Group of Seven] partners, and we continue to be prepared to act as appropriate.''

The Conference Board predicts 4 percent growth this year, one point higher than what White House economists are forecasting.

The economic outlook of manufacturers is more tempered. A survey of National Association of Manufacturers members suggests that ``industrialists are extremely cautious about future gains in demand, and that firms have not fully completed restructuring,'' says NAM President Jerry Jasinowski. He forecast that ``the economy will achieve a 2.6 expansion this year, slightly less than the consensus prediction.''

While they differ on growth projections, Greenspan observers widely expect that interest rates will continue to climb.