Economy Set To Slow Significantly? But Fed’s Vice Chairman Doesn’t Fear Recession
Growth in the U.S. economy is likely to be “significantly slower” in the second quarter as compared with the first three months of the year, Federal Reserve Vice Chairman Alice Rivlin said.
After growing at an unexpectedly high 5.8 percent pace in the first quarter, the economy’s likely to decelerate in the second three months of 1997, perhaps to a 2.0 to 2.5 percent rate of growth, Rivlin said in an interview.
Still, there’s “no reason to think we’re sliding into a recession,” Rivlin said. At worst, “if the second quarter is very slow, it’s likely to be a pause,” she said.
Rivlin is a member of the central bank’s policy-setting Federal Open Market Committee. At their last meeting in May, members of the FOMC voted to leave the overnight bank lending rate unchanged at 5.50 percent, after raising it by a quarter point in March. The FOMC meets again for two days on July 1-2.
The chief sign of weakness in the U.S. economy is “very slow, flat, retail sales, which are not likely to persist,” Rivlin said. Sales at U.S. retailers fell for the third month in a row in May, marking the first time that’s happened since September through November 1981.
Consumers went on a spending spree in first quarter and have pulled back in second quarter. However, Rivlin said she looks for consumers to spend more again in second half of the year, “because all the things that make consumers feel good are there.” Specifically, Rivlin pointed to high consumer confidence, low unemployment, and rising incomes.
That will lead to “good healthy growth in second half” of the year, she said.
Consumer confidence as measured by the Conference Board hit a 28-year high in May. Also last month, the U.S. unemployment rate slid a tenth of a point to 4.8 percent, the lowest in a generation.
For the first five months of 1997, monthly job growth in the U.S. averaged 229,000, higher than the monthly average of about 216,000 for all of last year. Strong U.S. labor markets could lead to “more rapid wage costs and accelerating inflation,” though inflation hasn’t accelerated yet, Rivlin said. On prices, Rivlin said, there “still seem to be risks on the inflation side.”
She warned that Fed policymakers have to be forward-looking. “If you think you’re going to get accelerating inflation, you have to act ahead of it,” she said.
So far, inflation has been tame this year.