ROANOKE TIMES
Copyright (c) 1996, Roanoke Times
DATE: Tuesday, January 2, 1996 TAG: 9601020153
SECTION: BUSINESS PAGE: 6 EDITION: METRO
DATELINE: WASHINGTON
SOURCE: EDWARD KEAN KNIGHT-RIDDER/TRIBUNE
FORGET THE BULL MARKET that dominated 1995. Though a recession doesn't appear likely in 1996, experts say, the economy is fragile enough for one to happen.
The U.S. economy should expand only modestly this year as wary consumers curb their spending after piling up too much debt, private economists say.
Nevertheless, the economy probably has enough vitality to avoid a recession. But an outside ``shock,'' such as a financial crisis or an oil price spike, could trigger a downturn, some forecasters warn.
``I would characterize this economy as fragile, vulnerable to a recession,'' said Key Corp. economist Kenneth Mayland.
With the economy likely to keep growing slowly, interest rates may fall a little more and inflation should stay below 3 percent, according to a survey of 33 economists.
Overall, the survey showed they expect real gross domestic product to grow 2 percent in 1996. That's based on the new ``chain'' method the Commerce Department will use to estimate the key measure of the nation's economic health. For the first three quarters of 1995, real GDP grew at a 1.8 percent annual rate using this method, according to the agency. Actual data for the 1995 fourth quarter have not yet been released.
For the 1996 first quarter, real GDP will grow at a less-than-stellar 1.8 percent annual rate, vs. an estimated 1.7 percent growth rate in the fourth quarter of this year, according to the average estimate of economists polled.
The survey found economists expect long-term interest rates to edge down in the first quarter from current levels. Rates on 30-year Treasury bonds are expected to average 5.98 percent, down from the current yield of about 6.0 percent.
Meanwhile, they expect rates on 3-month Treasury bills (on a bond equivalent basis) to average 5.08 percent in the first quarter, also little changed from current levels.
Consumer prices should rise at a 2.8 percent annual rate both in the first quarter and the year as a whole, according to the average estimate of the 33 forecasters.
Although the current expansion of the economy is in its fifth year, relatively long by historical standards, most analysts think it will last through 1996.
``There are very few imbalances in the economy,'' said Sam Kahan, of ASK Financial Research, explaining why a recession is unlikely in 1996. He puts the odds of a recession this year at 10 percent.
Many forward-looking economic indicators, such as the spread between short- and long-term interest rates, and the Conference Board's index of leading economic indicators, ``do not point toward a recession,'' Kahan said.
For about the next year, consumers cannot spend much ``because they're up to their eyeballs in debt,'' said George Dagnino, economist for Goodyear Tire and Rubber Co.
``The only source of strength in the consumer sector during the first half of 1996 is housing, which will continue to benefit from low interest rates,'' said Evelina Tainer of Indosuez Carr Futures.
Other factors cited by economists to explain why growth may be slow in 1996 include:
Uncertainties about job security in the wake of continued corporate cutbacks;
A moderation in business spending on equipment, such as computers; and
Persistently weak economic performance in other major industrial nations, which should curtail U.S. exports.
Finally, some economists argue that the Federal Reserve's monetary policy is still too tight, even after the Fed's recent quarter-point reduction in short-term interest rates.
Key Corp.'s Mayland, for example, said Fed policy is still ``restrictive.'' The Fed needs to lower interest rates another half to three-quarters points to bring its credit stance back to ``neutral'' - neither constraining nor stimulating growth, Mayland said.
Some economists, however, counter the Fed should be cautious about lowering interest rates further.
``A series of rate cuts is not necessary to maintain the moderate expansion,'' said Gary Ciminero, economist for Fleet Financial Group, of Providence, R.I. He warned there is a risk inflation will rise 0.25 to 0.5 percentage points over the next six quarters amid tight labor markets and an acceleration in some crude materials prices.
Mortgage Bankers Association economist Lyle Gramley, a former Fed governor, cautioned that the economy is at ``full employment'' and there is some danger of ``an uptick in wage pressures.''
LENGTH: Medium: 90 linesby CNB