A Crawling Recovery

USUALLY the United States economy snaps back from a recession like a stretched rubber band. Not this time. Since the downturn ended in the spring of 1991, economic growth has been at best modest. That discomfits economists and politicians. It makes a renewed slump more possible, though perhaps not likely.

After most postwar recessions, the real output of goods and services has thrust ahead at a 5 or 6 percent rate for a year or more. In this recovery, the annual growth rate for gross domestic product was only 1.4 percent in the second quarter of 1991, 1.8 percent in the summer quarter, and a mere 0.4 percent in the last quarter of 1991. Revised numbers show growth increased to a 2.4 percent annual rate in the first quarter of this year.

Such slow growth renews debate on whether the Federal Reserve System should be doing more to stimulate the economy. Last week, bond prices rose in anticipation of the Fed lowering short-term interest rates again.

One reason for this expectation is that a measure of money called M2 has been shrinking over the last two weeks. Growth in M2, the monetary aggregate most closely followed by the Fed, has slipped to a 1.6 percent annual rate so far this year, well below the 2.5 percent rate that represents the floor of the Fed's target growth range of 2.5 percent to 6.5 percent.

Some economists argue that if the Fed refrains from boosting growth in the broad supply of money to the economy - the fuel that feeds economic activity - it risks a repeat of last year's slowdown. Other economists maintain that the connection of M2 to the growth rate is less valid at the moment, that the more rapid growth in bank reserves and a narrower measure of money dubbed M1 is adequate to keep the recovery going.

The Fed will be keeping a close eye on employment, retail sales, auto sales, and housing. So far those reports have not been so discouraging. The modest pace of recovery continues.

Jerry Jordan, an economist and president of the Fed branch in Cleveland, noted last month that monetary policy cannot control the level of employment or real interest rates. The Fed can push down short-term interest rates. The financial market determines long-term interest rates according to its estimate of future inflation. Fed chairman Alan Greenspan last week complained that considering inflation prospects now, long-term rates are higher than they should be and slowing the recovery.

All this adds up to a tough call for the Fed. Slightly more monetary ease is called for. It could be reversed later if necessary.