US Economic Uptick Rated Modest at Best

Some analysts see spring gains fading by summer's end

WHEN economists talk about a "double dip" these days, they aren't speaking of an ice cream cone. They are referring to the possibility of the economic recovery that started in the United States this past spring petering out this summer."The risk of a double dip has increased in recent weeks," says Lynn Reaser, a senior economist with First Interstate Bancorp in Los Angeles. "The US economy is at best about flat." Richard Hokenson, an economist with Donaldson, Lufkin & Jenrette Securities Corporation, is even gloomier. He forecasts economic activity declining at a 2 percent annual rate after inflation in the second half of 1991 - down a bit faster than in the first half. "This will put a lot of pressure on the Fed [Federal Reserve System] with presidential elections 15 months away," he says. However, a broad majority of economists is expecting a continued, if modest, recovery. The Blue Chip Economic Indicators consensus of 51 economic forecasters puts real growth at a 2.8 percent rate in the second half of 1991. That's low by historical standards. The US economy has grown at about a 6 percent real annual rate in the first year of most postwar recoveries. "The economy is growing, but slowly," says Nicholas Perna, chief economist of Shawmut National Corporation. David Wyss, an economist with DRI/McGraw-Hill, points out that economic statistics normally give "mixed signals" during the start of a recovery. But he doesn't expect a "double dip." Several elements are causing economists to worry about the recovery: * Though the unemployment rate dropped slightly, from 7 percent in June to 6.8 percent in July, the nation lost 172,000 civilian jobs and the labor force declined by 415,000 in July. That unexpectedly weak job report last Friday prompted interest rates to fall and bond prices to rise. * Durable-goods orders fell at a 1.6 percent monthly rate during June. Most economists had expected a mild uptick. * Investment in housing has not snapped back rapidly. Mr. Hokenson says all other postwar recoveries (except the short-lived 1980-81 expansion) have had an unusually large contribution directly from housing and housing-related activity. * The personal savings rate has dropped from 4.7 percent of disposable (after-tax) income in July 1990 to 3.5 percent in June 1991. Usually, the savings rate climbs in a recession. "The consumer simply doesn't have the wherewithal to sustain spending," says Hokenson. r Growth in one measure of the nation's money supply (M2) has been at slim 3.1 percent annual rate in the past three months. "That is a red flag in our view," says Ms. Reaser. "There may not be enough monetary growth to support continued recovery." But she expects the Federal Open Market Committee, the Fed's policymaking body, to lower interest rates to sustain the expansion, possibly at its Aug. 20 meeting in Washington. "If I were the Fed, I would give the economy another kick," comments Mr. Wyss of DRI, a Lexington, Mass., economic consulting firm. With the rate of inflation declining, adds Shawmut's Mr. Perna, "the Fed has room to maneuver." However, Michael Keran, chief economist of the Prudential Insurance Company of America, looks at a narrower measure of the nation's money supply (M1) and finds that "liquidity and the economy are just fine." He forecasts a 2 percent annual growth rate in the economy in this second half of the year. Mr. Keran explains that M1, which includes currency and checkable deposits, has been growing at a strong 7.1 percent rate this year. M2 includes a large amount of time and savings deposits as well as the two components of M1, components primarily used in making payments. Keran says M2 has not grown as fast because of the declining role of banks and savings institutions in the supply of credit to the economy. Five years ago they provided about 30 percent of total credit in the nation, but only about 15 percent now after the demise of so many thrifts and the reluctance of hard-pressed banks to make any high-risk loans. Keran also figures that consumers, their confidence restored after the successful conclusion of the Gulf war, will step up their spending in the months ahead - despite their low savings rate. Other relatively optimistic economists point to a modest increase in housing starts, a rise in the government's main economic barometer (the index of leading indicators) for the past five months, and an increase in personal incomes and consumer spending in June as signs of continued recovery. So far, economists regard the 1990-91 recession as mild. The Blue Chip consensus expects that year-over-year national output in 1991 will be down only 0.1 percent after inflation from 1990. This average predicts gross national output will grow a real 2.7 percent in 1992.