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U.S. economy will be "rather tranquil" through 1997

ANN ARBOR—"The U.S. economy through 1997 will be "rather tranquil" overall, say economists at the University of Michigan. They report that the recent economic slowdown hit bottom a few months back and the economy is now firming up again.

"The fundamental outlook for most of next year and right through 1997 is for moderate growth, with real GDP 2 percent to 2.5 percent," they say.

The unemployment rate also will remain fairly stable, "moving in a narrow range around 5.75 percent."

And inflation? "Just not a problem." Consumer prices, which rose 2.3 percent during 1994, are forecast to rise by 2.3 percent during 1995, 3 percent during 1996 and 3.2 percent during 1997, they say.

What about the Federal Reserve Board? " Don't look for much in the way of further Fed actions, either way, in the next little while," the economists say.

The U-M annual forecast and update were prepared by Prof. Saul H. Hymans and Joan P. Crary and Janet C. Wolfe, researchers in the U-M Department of Economics. The forecasts are based on the Michigan Quarterly Econometric Model of the U.S. Economy, compiled by the U-M Research Seminar in Quantitative Economics.

If the activity surrounding monetary policy has cooled down, "fiscal policy is hot, active and center stage. Or more accurately, right-of-center stage," the economists note in the update.

The 1993 budget agreement, orchestrated by President Clinton and the Democrats, was " a major step in the direction of fiscal discipline and deserves a chunk of the credit" for the significant decline in the federal deficit in 1994 and 1995.

"Now the Republicans are in control of the Congress and are vigorously leading the way to a fiscally much smaller Washington...However it comes out, the federal budget will be contractionary over the next few years, and that increases the likelihood that the Fed will not be raising interest rates any time soon," they say.

The forecast also projects that:

• Real GDP growth returns to a 2.5 percent pace in the current quarter and then "accelerates to 3.6 percent in early 1996 as light vehicle sales recover and inventory building responds to the growth in final sales." As both light vehicle sales and inventory accumulation level off, output growth slows to a 2 percent to 2.5 percent pace during the rest of 1996 and 1997.

• Residential construction "made a significant negative contribution to growth in the second quarter of 1995, despite the drop in mortgage rates" in the first half of 1995, the economists say.

However, "with the mortgage rate hovering around 8 percent over much of the forecast period, residential building stops being a noticeable drag on the economy after mid-1995." After declining from 1.45 million in 1994 to a projected 1.3 million in 1995, housing starts remain at just under 1.3 million for both 1996 and 1997.

• Vehicle production dropped sharply in the second quarter of 1995, and in the third quarter, " this sector continues to be a drag on the economy as sales hold steady and auto companies work to reduce stocks," they say.

Auto sales, which totaled 9.2 million units in 1994, are forecast to be 8.8 million in 1995, 8.9 million in 1996 and 8.8 million in 1997. Light trucks sales, 5.8 million in 1994, will hold at 5.8 million in 1995 and then rise to 6 million in 1996 and 6.2 million in 1997.

• The business equipment sector is expected to make a strong contribution to real GDP growth through 1997. " Due to a sharp surge in information processing equipment" over 40 percent at annual rate" purchases of business equipment contributed 1.7 percent to output growth in the second quarter of 1995."

As the growth in information processing equipment slows to a more sustainable pace, business equipment purchases contribute nearly 1 percent to output growth during most of 1996 and 1997.

• Real net exports are forecast to improve temporarily during the second half of 1995 in response to the previous weakening of the dollar. By spring 1996, however, exports are again " acting as a drag on the economy, making negative contributions of 0.25 percent to 0.5 percent" to growth, as imports outpace exports.

• After declining sharply during fiscal 1994, the federal deficit has shown little further improvement during fiscal 1995, holding at about 2.3 percent of GDP, the economists report.

However, " the spending restraint embodied in the proposed deficit reduction package and the projected growth in output allow the federal budget deficit to decline steadily over the next two fiscal years to 1.6 percent of GDP ($119 billion) by the end of fiscal 1996 and 1.3 percent of GDP ($103 billion) a year later."

• Three-Month Treasury Bill rates, which were 4.2 percent in 1994, are forecast to average 5.6 percent in 1995, 5.4 percent in 1996 and 5.3 percent in 1997.

• Thirty-Year Treasury Bond rates, which were 7.4 in 1994, are forecast to average 7.1 percent in 1995, 6.8 percent in 1996 and 6.6 percent in 1997.

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