Outlook grim for economic growth

By Alan M. Geyle Economic Research Officer United Virginia Bank Richmond. Va.

FIESPITE the decline in rates and Elower level of inflation, real economic growth in 1983 will be just under 290. The consumer will lead the recovery as he has done in the past spurred by lower inflation and reduced interest rates.

The recent uptick in the housing market will continue as mortgage rates fall, but a strong recovery in the housing sector may not be forthcoming. Housing starts may reach just under a I Zz million unit annual rate by the fourth quarter next year.

Businesses will remain conservative next year in an attempt to strengthen balance sheets and improve profit margins. Considering the high level ofunused plant capacity, it is difficult to envision any improvement in capital spending next year.Inflation will continue to moderate, running approximately 4o/o for the year. However, the unemployment rate will remain stubbornly high averaging 9Vz-l0t/o for the vear.

Story at a Glance

No capital spending upturn .. . inllation to run 4o/o ... high unemployment heavy Fed borrowing. . . high mort. gage rates . . . little relief for housing.

A major concern to the financial markets next year is the size of the Federal deficit. Despite an estimated $26 billion revenue gain from TEFRA, I expect the Treasury to raise at least $175 billion in new money next year. This tremendous financing requirement of the Treasury, however, should not prevent a further decline in interest rates in 1983.

The level of Treasury financing will place some upward pressure on rates, primarily because the Fed cannot be expected to "monetize" the debt as it has done in the past. However, further declines of lVz-2 percentage points are very likely throughout the course of the year. The prime rate should droptol0Vzslo and Treasury bills may drop as low as 6Vzs/0. Rates may drop lower if the Fed decides to become more stimulative, but that may be too optimistic. With the basic conditions I have outlined here, a strong housing recovery should not materialize although some factors will improve. Financing will be the key to home affordability as it has been in the past. Mortgage rates will fall as the economy flounders, but they will be held to historically high levels by: (1) heavy Treasury borrowing draining away funds from the private sector and (2) continued reluctance by banks and savings and loans to extend low cost money for long term mortgages. one final factor in housing demand next year is that with the more competitive interest rates for savers, many consumers will choose to postpone major purchases.