Economists panel predicts mild growth, small gains in rates, inflation for 1994.

CHICAGO -- Private economists are relatively confident that the economy will expand at least by 2.5% next year despite constraints on growth such as health care reform and higher taxes, the president-elect of the National Association of Business Economists said yesterday.

William Dunkelberg, president-elect of the business economists' group, said the forecast of moderate growth in 1994 is supported by expectations of only modest gains in inflation and interest rates.

His comments came yesterday after the business group reported that its 41-member panel of professional forecasters predicted 2.5% real growth in the first half of next year and 2.8% average growth for all of 1994.

"The membership in general is surprisingly confident that the economy will at least maintain its longer-term growth trend next year," Dunkelberg said in an interview.

Specifically, the association panel forecast that the consumer price index would grow at an average rate of 3.3% next year, compared to an expected 3.2% rate this year, the group reported.

Notably, the panel predicted that 30-year Treasury bonds would yield 6.8% on average next year, up from an anticipated 6.6% average yield this year.

The group's consensus forecasts were derived from individual estimates submitted prior to Sept. 1. Several members of the group acknowledged that the 6.8% forecast is probably now too high given the recent bond rally.

"That forecast may be a little high now," said Joel Prakken, an economist with Laurence H. Meyers & Associates Ltd. in St. Louis, during a panel discussion of the forecasts.

However, Dunkelberg noted that several of the forecasters factored an upward spike in interest rates sometime next year into their forecasts. "Some of them think something might scare the bond market and push rates back up," he said.

Coupled with the expectation of modest growth and relatively stable inflation, two-thirds of a separate 228-member panel predicted the Federal Reserve will maintain current interest rate levels for the next six months.

The panel held essentially the same view at the beginning of this year, according to a January survey.

Also, a majority of the panel agreed with the course it expects the Fed to take. "For the next six months, monetary policy should remain unchanged according to 62% of the panel with a very slight bias toward more stimulative rather than more restrictive policy," the business group said in a summary of the latest survey results.

Businesses are generally more worried about the White House than the Fed, several economists said.

Dunkelberg noted that companies in general are most worried about potential hikes in the cost of labor, such as through federally mandated health-care coverage and an increase in the minimum wage.

Stuart Hoffman, chief economist of the PNC Bank Corp. in Pittsburgh, said the threat of higher health-care costs is significantly depressing currently employment growth. Health-care reform scares businesses far more than a one-time increase in the minimum wage, he said.

Speaking at a luncheon during the group's annual conference, Laura Tyson, chairman of the President's Council of Economic Advisers, tried to dispel health-care-reform phobia by saying the President's plan may cut or at least stabilize the cost of health care for firms that already provide it for their employees.

"The reform plan may benefit many firms," Tyson said, noting that the beleaguered manufacturing sector has long complained about skyrocketing health care costs.

Resulting in part from these health-care fears, the business economists predicted that unemployment next year will average 6.6%, down only slightly from an anticipated 6.9% rate this year, the group reported.

"As panelists put the natural rate of unemployment at 5.9% there will be sufficient slack in labor and product markets to head off any meaningful acceleration of prices," the group said.

Despite sluggish employment growth, the panel Predicted that growth will pick up to 3% in the current quarter, but that will be "as good as it gets," for awhile.

One reason why most of the forecasters are confident that the economy will see at least 2.5% growth next year is because they have assumed the trade picture for the United States will remain dismal, Dunkelberg said.

But those forecasters also realize they might be wrong and world demand for U.S. products may pick up enough to boost growth, Dunkelberg said. "They know growth may increase more overseas than they expect," he said.

While fielding questions, Tyson said the Clinton administration has not Put forth an official plan to increase the minimum wage, despite recent suggestions to that effect by Labor Secretary Robert Reich.

She also noted that the administration does not currently have plans to ask Congress for a short-term stimulus plan, as some news reports said.

"We are working through investment initiatives, and defense conversion is a good example," Tyson said.

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