US Economy Looks Good, But Peer Under the Hood

FOR now, the United States economy looks like an old car with a new paint job: It is pretty on the outside, but has developing problems underneath.

Brisk growth in the third quarter belies weakness in many of the nation's key economic sectors.

Recent Commerce and Labor Department statistics show job growth this year at half what it was in 1994. Households are burdened by mounting consumer debt, and business investments in new plants are slipping.

Moreover, with federal spending constraints a foregone conclusion in the months ahead, the White House and some leading economists are looking to the Federal Reserve Board to stimulate the economy by cutting interest rates.

''This time around, the budget deal and monetary easing are woven together,'' says Sung Won Sohn, chief economist of Norwest Corp., a Minneapolis-based banking and consumer-finance firm.

Proponents of an interest-rate reduction argue it would prevent the economy from stumbling.

Mr. Sohn doesn't expect the nation's central bank to cut interest rates before a Congress-Clinton budget deal is reached. But once it goes through in late December or early January, ''Chairman Greenspan and his colleagues will ask 'Is it meaningful?' ''

He and others see at least one reason why the Fed wouldn't lower rates: if the budget accord were to produce tax cuts at the front end of the fiscal cycle, providing a quick stimulus, and delay reductions in spending, postponing the drag on the economy.

The next Federal Open Market Committee (FOMC) meeting is scheduled for Nov. 15, when policymakers will plot monetary strategy for the coming months. At least one Fed governor, the outspoken Lawrence Lindsey, has already committed himself to lower rates. Last week he said the FOMC should go ahead and ease credit, with or without a budget accord, given what he expects will be a slow economy over the next six to nine months.

Some of the numbers are lackluster. In the next eight months, federal inflation-adjusted purchases of goods and services will fall at about an 8.3 percent annual rate, according to DRI/McGraw-Hill, a Lexington, Mass., consulting firm. That would chop about 0.5 percent off the nation's real economic growth rate.

Most economists, though, expect the economy to continue growing at a modest pace. A survey of 50 economic forecasters by Blue Chip Economic Indicators puts the growth in the real output of goods and services next year at 2.5 percent, down from 3 percent this year.

October's 5.5 percent unemployment rate was cheering news. But it hides some disturbing information. ''The decline in the unemployment rate reflects an ongoing ... lack of labor force growth,'' says Bruce Steinberg, economist at Merrill Lynch & Co. in New York. ''The US economy probably contains ample reserves of potential workers who are not reporting themselves as part of the labor forces ... and more labor market slack in the US economy than unemployment data alone would indicate.''

The outlook for major job generation is dim, while real wages continue to stagnate, if not decline, for roughly 40 percent of the working population.

Worried that the past several years of economic growth will be lost on voters by the time they are ready to go to the polls next year, the White House is pushing hard for easier monetary policy. Joseph Stiglitz, chairman of President Clinton's Council of Economic Advisers, emphasizes the absence of the Fed's most fundamental concern: rising prices. ''It is particularly striking that inflation remains so moderate,'' he says.

What are the risks if the Fed doesn't lower rates?

''The Fed should take out an insurance policy to fortify the US economy,'' Sohn says. ''Not because it is falling apart, but to insure continuing growth.'' If the Fed refuses to ease, he warns, the economy's so-called soft landing will not be able to withstand external shocks. ''If the Japanese banking system goes haywire, for example, spurring an international banking crisis and pushing interest rates up, our own economy wouldn't take it very well.''

Low- and middle-income earners are considered most vulnerable to lower government spending and higher borrowing costs. But their fortunes have broader implications, since they make up three-quarters of the nation's consumers. Consumer spending, which makes up roughly two-thirds of the economy, would be weakened if three-quarters of all consumers stopped buying, borrowed less, and failed to repay their loans.

Sohn says most of the consumer debt today is in low- and middle-income households and rising rapidly. The Mortgage Bankers' Association reports that defaults on FHA loans are climbing, while credit-card debt delinquency has risen to a near record high. ''Keeping the economy moving forward,'' is the administration's highest priority, White House budget director Alice Rivlin said last week. ''The worst thing that could happen to the people at the low end of the income scale is a major recession.''

That group, she says, ''is a big problem facing the economy, and I don't think we have the answer yet.'' She sees education and training as the best hope, but concedes such prescriptions are long-term and leave lower- and middle-class workers exposed. In the interim, Rivlin says, ''we haven't given up the fight'' for an increase in the minimum wage and maintaining funding levels for the Earned Income Tax Credit, two battles Clinton will likely lose.