Business Council Predicts Anemic Growth Through ’86 : Economy May ‘Muddle Through’
HOT SPRINGS, VA. — A blue-ribbon panel of executives forecast Friday that the economy will “muddle through†the next 15 months with gradually rising prices and interest rates and a marked slowdown in spending by overextended consumers.
In its semiannual analysis of the economy, the Business Council predicted an anemic 2.1% growth in the economy for all of 1985 and 2.5% for 1986. It was a more pessimistic projection than the Reagan Administration’s prediction of 3% growth for 1985 and 4% for 1986.
The 65-member council, made up of executives of many of the nation’s largest corporations, said the enormous U.S. trade deficit and a record consumer debt were principal reasons for the lackluster forecast.
“We don’t expect a recession but certainly not strong growth,†said James D. Robinson III, council vice president and chairman of American Express.
He said consumer debt is at an all-time high, running at an average of 19% of family income. The last peak--17.8%--was in 1978.
“The pace of consumer spending is expected to show a decided slowdown, with households having spent and borrowed beyond what can be supported by growth of real income,†said the report prepared by the council’s economic analysts.
The forecast predicted that consumer spending will rise 4.1% overall this year, then drop to 2.1% in 1986 as “households retrench to strengthen their financial positions.â€
Higher Taxes
The council also said that an “overwhelming majority†of its consultants “believe that higher taxes will eventually be necessary to reduce federal budget deficits sufficiently.â€
The report said interest rates, which have dropped 2 to 3 percentage points over the past year, were likely to begin inching up again--with the prime rate expected to rise from 9 3/4% at the end of 1985 to about 10 3/4% by next September.
And it forecast a “modest acceleration†of inflation--rising from just under 4% for all of 1985 to just under 5% for 1986. The council’s economic advisers said the increases in both interest rates and inflation reflect anticipated declines in the value of the dollar against other major foreign currencies.
But the panel said it will still be some time before a drop in the dollar--nudged down by recent actions of the five major industrial nations--will have much impact on the U.S. trade deficit, expected to reach $133 billion this year.
The report predicted “continuing chronic problems in the trade sector†and said “no major relief†is in sight for hard-pressed U.S. manufacturers battered by competition from imports.
The report said unemployment would hover at its relatively high level of about 7% through 1986.
Deputy Treasury Secretary Richard G. Darman told the council, here for a three-day retreat, that its latest forecast was “ominous.â€
“Luckily, the gloomsayers have been consistently off the mark,†Darman said. “But I certainly don’t mean to make light of dark visions.â€
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