U.S. ECONOMY SET FOR STRONG GROWTH IN 1996.

NEW YORK--(BUSINESS WIRE)--Dec. 18, 1995--Low long-term interest rates and the continuing stability of the overall economy will produce much stronger U.S. economic growth in the first half of 1996 than in the first half of this year, and will reaccelerate inflation, according to an analysis released today by The Conference Board.

"The Federal Reserve Board's recent success in curbing inflation may prove to be its own undoing," says Gail D. Fosler, Vice President and Chief Economist of The Conference Board. "By heightening financial market expectations and pushing long-term interest rates lower than economic fundamentals would warrant, the Fed has unwittingly set the stage for the next phase of the expansion."

In her monthly newsletter, StraightTalk, prepared for Conference Board Associates, Fosler says that this phase will begin at much lower unemployment and higher capacity utilization than when the Fed first raised interest rates two years ago.

While higher long- and short-term interest rates may be delayed by excessive optimism about this year's budget package, the longer this necessary adjustment takes, the higher interest rates will ultimately rise.

Although inflation is currently running at a rate of 2% to 3%, a remarkable performance for the fifth year of an expansion, it is more likely to rise than decline. Industrial prices are still 7% to 8% higher than a year ago. The deflation that marked the early 1990's is notably absent even though prices have been generally weak over the past four or five months.

Consumer goods prices are still rising at a 2% annual rate at the producer level and discounting appears to have ended at the retail level.

The key issue, however, is not either inflation or deflation, but price flexibility, Fosler emphasizes. Prices respond quickly to changes in demand. A reacceleration in demand will therefore raise prices. Ironically, it is the price flexibility that supports growth, and makes it unlikely that economic weakness will persist long enough to put inflation down on a sustained basis.

The budget package making the rounds in Washington will more likely help growth than hurt it. About one-third of the $90 billion in spending cuts in Fiscal Years 1996 and 1997, for example, shifts program responsibility to the states and may not materially affect total government activity. Another third represents Medicaid reform and transfer to state authorities; and the last third comes from federal Medicare reform. The economic effect of these reductions are very different from the defense cuts in the 1980's, representing a deceleration in spending growth, not absolute reductions, in the volatile health care area. This will still leave the growth in federal health care spending at twice the rate of growth in business spending or health care.

The economy is continuing on a solid track with fourth quarter growth likely to equal or exceed the third quarter. Previous Conference Board forecasts, based on the 1987 fixed weight price deflators, have projected the economy to grow 3.5% in 1995 and 3.9% in 1996 -- with fourth quarter growth of 4.9%. A preliminary estimate of The Conference Board forecasts based on the upcoming chain-weight price deflators would put real GDP growth at 3.9% in the fourth quarter of 1995 and 3.1% for all of 1996.

Source: StraightTalk, Vol. 6, No. 10, Nov./Dec. 1995, The Conference Board

CONTACT: Gail D. Fosler

[phone]

The Conference Board