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NEWS ANALYSIS : Economic Growth May Slack Off Soon : Inflation: Experts say the 3-year expansion is nearing its peak, which could hurt both Republicans and Bill Clinton.

November 14, 1994|PATRICK LEE | TIMES STAFF WRITER

The good economic news just keeps coming: inflation remains under control, growth is solid and the nation's unemployment rate is at a four-year low.

Yet as the Republicans take control of Congress, empowered by a public frustrated over a declining standard of living and government's inability to do anything about it, there are signs that the 3-year-old economic expansion is nearing its peak.

The bad news for the revitalized GOP: At worst, the nation could go from strong growth and low inflation to a world in which consumers have less money to spend and are paying double-digit rates on fixed-payment mortgages.

At the very least, the economy's recent growth rate will likely slacken in the next year, economists agree, though output and employment should continue to improve.

"We're downshifting from fourth to third gear, and we will be down to second gear by next spring," says David Wyss, an economist at DRI/McGraw Hill in Lexington, Mass. The prospect of another recession--at least before 1997--is remote, however.

A slowdown would be more bad news for Bill Clinton, who has tried with little success to win credit for the recent economic growth. Instead, the Administration may find itself being blamed for economic sluggishness just in time for the 1996 election.

California is just now coming out of the slump that most of the rest of the country began to shed in 1991. "In one sense, that's good, because it means it has momentum building up to offset national weakness," Wyss said. "On the other hand, it is hard to grow in a slow national economy."

A forecast released last Thursday by Blue Chip Economic Indicators of Sedona, Ariz., sees the nationwide economy slowing to a 2.7% growth rate in 1995 from a revised 3.8% rate in 1994--the strongest since 1988.

Other forecasts vary, but most say that expansion of the U.S. economy will slow to between 2.5% and 3% by 1995 from the generally expected range of 3.5% to 4% in 1994. And a further slowdown is forecast for 1996.

If the Federal Reserve Board succeeds in keeping a lid on inflation, prices should rise between 3% and 3.5% in 1995, a bit faster than 1994 but below a feared 5% or more if things get out of hand.

For now, there are ample signs that the economy is very strong and--notwithstanding Thursday's report of falling wholesale prices--pressures are building for consumer prices to rise:

* Manufacturers are operating at near the 85% capacity rate, considered the point where bottlenecks begin to occur. Several businesses report that raw materials are running short and prices are climbing, a sign that suppliers of such items have already reached full capacity. (Wholesale prices dropped 0.5% in October after a similar drop in September, but most of that was attributable to lower new car prices.) Pressure is building on manufacturers to pass on to customers the higher costs of materials--something that has not yet happened in most cases.

* Business investment in areas such as computers and information processing equipment has been booming for the last year and is certain to cool, said R. Jeffrey Green, professor of business economics at the Indiana University School of Business.

* The nation's unemployment rate dipped to 5.8% in October from 5.9% the month before. Hourly wages rose at their fastest pace in 11 years. Economists generally consider 6% to be the rate at which the economy is operating at so-called full employment, the point at which pressure mounts to hike wage rates as labor becomes scarce.

* Interest rates continue to climb: the Federal Home Loan Mortgage Corp. reported last week that rates for 30-year fixed-rate mortgages reached 9.05%, their highest levels since 1991. The bond market continues to view the nation's strong growth with unease, sending yields on the benchmark 30-year Treasury bill above 8%. And economists widely believe that the Federal Reserve Board, in an effort to forestall further inflationary pressures, will hike short-term interest rates this month by at least 50 basis points, and again in early 1995.

At the same time, signs that an economic slowdown will occur in the months ahead also abound. The pace of home-buying has started to slow. Manufacturers have been building inventories at a rate that can't be sustained. Retail sales were off in the fall.

Consumer spending, which also has been running at an unsustainable high rate, is sure to slow, particularly since much of the last year's buying binge was paid for by refinancing home mortgages. The refinancings have all but dried up, and consumers have been incurring new debt. Higher interest rates should dampen the heretofore strong demand for durable goods such as autos, furniture and appliances.

For some businesses, a slowdown in the nation's economy is likely to be offset by continuing growth in export markets, particularly as Japan and Western Europe pull themselves out of their own recessions.

Overall, export markets will be important to California's continuing recovery, particularly as the national economy slows, said Wyss at DRI/McGraw Hill.

California "benefits more than usual from trade with Mexico, Japan and East Asia, and that ought to be a help," he said.

* RATE HIKE POSSIBLE: The Fed is expected to increase interest rates again. D6

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