Up, up, and away?

ACCORDING to the Washington crew, the U.S. economy has enough buoyancy for a sustained takeoff. Lower interest rates, it seems, are finally bringing back business investment, housing starts, and purchases of big-ticket items such as cars and appliances. The unemployment rate, at 6.8 per cent, remains relatively high, but it has fallen, and many analysts see 2.5 to 3 per cent growth for the next few years--a likely re-election scenario for Mr. Clinton.

More than a few caveats are in order, however. While things have picked up over the last month or two, this has happened at least five times before, since the recession ended in March 1991. Consumers are leading the charge this time around. For the past year, however, consumer spending has increased more than twice as fast as disposable income, a phenomenon made possible by credit cards and the windfall some of us have realized from mortgage refinancings. This clearly cannot continue. Nor is the demand for American exports likely to persist in view of Japan's renewed recession and the monetary turmoil in Europe. Manufacturing employers, sensing this impermanence, increasingly prefer to increase worker hours rather than hire new workers.

We expect a good fourth quarter, driven by auto sales, extensive rebuilding activity in the flood-damaged Midwest, and, of course, Christmas. The rapid phase of the recovery may already be over, however. Revised statistics indicate that the quarterly growth rates in 1992 were 3.5, 2.8, 3.4, and 5.7 per cent. During the first three quarters of 1993, the economy grew at 0.8, 1.9, and 2.8 percent. Unless the economy zooms at an unheard-of--and possibly dangerous-10 percent rate in the last quarter, 1993 will record slower economic growth than 1992. A prolonged period of 2 per cent or less growth is possible. Superimposed on the normal business cycle are huge policy. imponderables. The economy has weathered, albeit barely, George Bush's tax hike, his minimum wage hike, the Clean Air Act, and the Civil Rights Act. The impact of Mr. Clinton's tax hike or his antitrust and regulatory initiatives has yet to be felt by the economy. And these interventions are likely to be dwarfed by his proposals for socialized medicine financed by employers.

Inflation is quiet, but we are at the bottom of the cycle. Mr. Clinton's tax and regulatory approach will tend to throttle the supply side, and bump up against Alan Greenspan's efforts to pump money into the financial system. Too much money chasing too few goods equals inflation. That is the message behind the recent resurgence in the price of gold.