Economy: Stop-and-Go Signals on Road to '96

THE 1996 election is still over a year away, but presidential hopefuls are already angling for the best position on what voters care about most: the economy.

If it performs well over the next year, politicians will be anxious to claim credit. If it runs into trouble, they'll be ready to lay blame. President Clinton, whose popularity ratings have generally been in sync with the state of the United States economy, has the most at stake.

The GOP can easily target the White House if the nation's engine misfires. But if it is robust, Clinton's challengers are likely to point to fellow Republican and Federal Reserve Board chairman Alan Greenspan, who lowered interest rates to engineer a soft landing instead of a crash into recession. And, if all goes according to their plans, they will boast that their tax cuts and deregulation helped to stimulate growth.

For now, no one seems to have the moral upper hand: The economic news is contradictory. True, inflation is low and interest rates are down. But too much inventory is piling up in warehouses, and consumer confidence is lackluster. Projections from top economists reflect the mixed signals.

"Inflation is subdued. Equally important, US economic growth, far from showing evidence of a strong revival, remains soft," says Bruce Steinberg, manager of macroeconomics at New York's Merrill Lynch & Co.

Managing to avoid recession in 1995 is no guarantee that the US economy will avert a downturn in 1996, says David Levy, director of forecasting for the Jerome Levy Institute of Economics at Bard College in Annandale-On-Hudson, N.Y.

Mr. Levy, whose institute has accurately called the 1990s economic ups and downs, has revised his 1996 outlook from a 50 percent to a 40 percent probability of recession. "This is an economy that is struggling, and there are a lot of vulnerabilities," he says.

The Philadelphia-based WEFA Group foresees "moderate growth and benign inflation" for 1995's second half, "however, an abrupt takeoff of economic activity is not in the cards."

Mr. Levy is more pessimistic. "At best we're looking at a sluggish third quarter - zero to 1 percent growth." In the longer term, he warns, "the economy's on a knife's edge." If the inventory build-up persists, the September to December period could also be disappointing and lead the country into recession come 1996, he says. Tax cuts, if enacted in the 1996 budget, could temper the slowdown, but not prevent it, he adds.

The number of factory jobs has dropped by 188,000 over the past four months - with losses most acute in the auto and aerospace industries. (Nearly 40 percent of the workers in aircraft manufacturing have been laid off because of cutbacks during the past five years.) Orders to US factories fell again in June, the fourth drop in five months.

"If this goes on, within a few months we will have lost all the jobs added during the recovery that began in October 1993 and stretched through March of this year," warns Jerry Jasinowski, president of the National Association of Manufacturers.

Others are watching automobile sales. Sung Won Sohn, chief economist of Minneapolis-based Norwest Corp., says the buildup of cars, trucks, and vans has been the biggest part of the inventory problem. His numbers show that sales for July to September are already disappointing.

Not all the signs are bad, though. The Federal Reserve does seem to have engineered a "soft landing," says Wayne M. Ayers, chief economist for the Bank of Boston, which means there will likely be no need for a dramatic shift in interest rates nor a "stinging recession in 1996." "We're talking fine-tuning," he says.

Corporate profits have also been strong - up an average of 11 percent for all companies in the second quarter, according to a study by the Economic Forecasting Center at Georgia State University in Atlanta. And new housing starts shot up earlier this month, though some economists predict only modest increases from here.

As for retail sales, G.A. Wright, a Denver-based marketing firm, looks for improved prospects in the second half of the year. Bard College's Levy offers one caveat, though.

He doubts that easier credit will spur significant purchases of big-ticket items, such as washing machines and refrigerators. The dramatic interest-rate drops of 1993 "resulted in a flood of refinancings on existing homes," he says. This freed up a lot of capital that consumers spent on durables, so a lot of demand has already been met.

The administration, for its part, is cheered by what it sees. Alice Rivlin, Mr. Clinton's budget director, says she is "heartened" that while "the Republicans have accused the administration of a rosy scenario ... Blue Chip forecasters say they have more confidence in our 1996 [GDP] growth projections [2.5 percent] than the Congressional Budget Office's [2.3 percent]."

At a recent Monitor breakfast, Treasury Secretary Robert Rubin was even more bold. He predicted that "in a year from now, the economy will register solid growth, moderate inflation, and unemployment under 6 percent."

Thus, the prelude to 1996 is under way. Whatever the economic outcome is, however, Levy says it won't be due to just one party.

*Staff writer David Mutch in Boston contributed to this report.