The Risk of Recession

Will Jimmy Carter's rescue operation lead to a recession? A growing number of economists are forecasting one for 1979, with their odds varying from about fifty-fifty to 2 to 1. Members of the TIME Board of Economists see it this way:

Arthur Okun of the Brookings Institution: "A recession is now a probability rather than a possibility for next year."

Otto Eckstein of Data Resources, Inc.: "In the end all the President could do was follow the Republican recipe, to tighten up the economy. It has never worked without a recession."

Robert Triffin of Yale University: "The new program gives convincing evidence that the U.S. will fight inflation, but recession is a serious danger. We may have to accept an interim period of this unpleasantness."

Joseph Pechman of Brookings: "The President's program substantially increases the probability of a recession very soon."

Consultant David Grove: "There may be no way to break the back of inflation without recession. We aren't capable of fine tuning." but recession is a serious danger. We may have to accept an interim period of this unpleasantness."

Joseph Pechman of Brookings: "The President's program substantially increases the a recession very probability of soon."

Consultant David Grove: "There may be no way to break the back of inflation with out recession. We aren't capable of fine tuning."

Alan Greenspan of Townsend-Greenspan and Co., Inc.: "Carter's actions significantly increase the probability of recession by mid-1979."

A recession is roughly defined as two consecutive quarters of real decline in the gross national product. Most of the six U.S. recessions since World War II have started with high interest rates' causing a slowdown in housing. Then; came reduced consumer spending and cutbacks in business outlays for plant and equipment. Even if the prospective recession follows that traditional pattern, though, most economists now believe it will be comparatively mild and not a repetition of the severe downturn of 1973-75.

One of the more pessimistic views is held by James Howell, chief economist and vice president of Boston's First National Bank. He thinks the economy has sufficient momentum to carry it to the beginning of the second quarter in 1979, but "then the country will have a tough row to hoe for the remainder of the year." Howell expects 2 million people to be added to the unemployment rolls, leading to a jobless rate of about 8% (compared with a high of 9.2% during the last recession). A. George Gols, an economist with Arthur D. Little, Inc., expects a recession that "only technicians will be able to define." There may not actually be two successive quarters of negative growth, he says. A quarter of decline might be followed by a quarter of slight growth, then back to a decline. "It will feel painful," says Gols. "When you sprain or fracture an ankle, it still hurts."

Administration officials do not accept the forecasts of a recession. Last week Treasury Secretary W. Michael Blumenthal speculated that next year's growth in G.N.P. would be about 3% or more. "It may be a shade above that for a quarter or two," said he, "or a shade below." Added William Cox, deputy chief economist at the Commerce Department: "I still feel we're not likely to have an outright recession next year. There are several elements of strength in the picture." He cited increased business investment and the improving balance of trade. "There's a reasonably good chance that business investment will not be knocked into a cocked hat. The question is how well business can look over the valley and gauge the steepness of the hill on the other side."

The Administration's optimism is supported by some outside experts. Karl Otto Poehl, vice president of the Bundesbank, West Germany's central bank, believes a U.S. recession can be averted by skilled handling of monetary policy and

the eventual easing of interest rates. "There will be a braking effect," he says, "but other economic indicators are quite strong in the U.S., and a cautious balancing should avoid recession." Werner Flandorfer, currency expert of the Bonn Economics Ministry, agrees. "The Fed's action will not have any real recessive effect. It will slow down the boom but will not plunge the country into a recession."

A large number of economists, however, feel that a recession is destined no matter what the Administration may do. "There is no such thing as an uninterrupted period of expansion," says James H. Lorie, a professor of business administration at the University of Chicago. "The current expansion is 3 1/2 years old. So it's past middle age. A downturn has got to be next." Some observers feel that it would be better to have a recession sooner rather than later. Says Washington University's Murray Weidenbaum, also a member of TIME'S Board of Economists: "We've now taken the painful medicine that will both slow down inflation and the economy. The alternative was a more serious downturn after a more serious inflation in 1980. The longer you postpone the distasteful medicine, the bigger the dose you have to take."

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