U.S. ECONOMY SLOWDOWN RAISES RECESSION FEARS
The economy faces lackluster growth
and the risk of recession this year if the recent improvement
in U.S. exports should falter, economists say.
    Growth will slow sharply in the next months due to weakness
in the key housing and auto sectors and could be further
hampered unless consumer spending picks up, they say.
    "These factors raise the question: Is there enough strength
to keep the economy from tipping into a recession?" said Lyle
Gramley, chief economist of the Mortgage Bankers
Association and a former Federal Reserve Board official.
    The Commerce Department said this week that the economy
grew by a robust 4.8 pct annual rate in the first quarter, but
a U.S. monetary official called it a weak report.
    Housing starts fell 2.7 pct in May, and consumer spending
rose a weak 0.1 per cent.
    "Our two largest visible industries -- autos and housing --
are faltering, but exports are picking up some of the slack, "
Martin Mauro, senior economist for Merrill Lynch Economics,
told Reuters.
    Gramley said he is worried that consumer spending may slow
because inflation is rising faster than real wages.
    To offset this, U.S. exports must continue to rise,
returning enough jobs to the manufacturing sector to boost
personal income and consumption, he says.
    "I expect to see enough improvement in real net exports to
keep a recession from happening, but it is a close call,"
Gramley said.
    Federal Reserve Board Governor Martha Seger told reporters
that the apparent strength in the 4.8 pct growth figure was the
result of a temporary buildup in inventories that will not last
and said the recovery was showing anemia.
    Seger said that with the recovery stumbling along, "The pace
of the economy and the lack of robustness must be factored into
monetary policy" - possibly a signal that the Fed will be
accommodative.
    Most economists predict growth slower than the 3 pct
forecast by the Reagan administration for 1987 and warn that if
the dollar drops suddenly, higher inflation will result and add
to the risk of a recession.
    Mauro said a 0.5 pct rise in industrial production in May
came despite cutbacks in output in the auto industry, where an
inventory overhang still exists.
    He says the boost in production came from smaller
industries like paper, chemicals, and lumber which have
improved sales overseas due to the drop in the dollar.
    "They are not going to be enough for any kind of surge in
economic activity, but I think they will keep us out of a
recession," Mauro said.
    In a speech to financial planners this week, Beryl
Sprinkel, the chief White House economic adviser, predicted the
trade deficit will continue to improve.
    "Prospects for continued economic growth through 1987 and
into 1988 are still quite favorable," he said.
    But private economists raise concerns about a resurgence in
inflation.
    Allen Sinai, chief economist at Shearson Lehman Brothers
Inc., told Congress this week that inflation would rise to 4.5
to five pct this year and stay at that level through 1989 after
a 1.1 pct increase in 1986.
    The rise is coming from a sharply lower dollar, higher oil
and energy prices and rising prices for services, he said.
    "The lesson of history is that once the inflation genie gets
out of the bottle, it continues to persist," he said, adding he
would like the Fed to tighten credit.
    A major factor affecting inflation is the value of the
dollar, which should continue to fall and feed inflation, says
a prominent international banker.
    Rainer Gut, chairman of Credit Suisse, told the National
Press Club that the dollar's downward trend against the yen and
the mark will continue for years because the United States is
the world's largest debtor nation.
    The Swiss banker said the economic indicators point to a
further slackening of activity and called naive the belief that
the five-year boom on world equity markets will go on forever.
"It is very difficult to be optimistic," Gut said.
 Reuter
