WASHINGTON--The economy is in the midst of what's expected to be the toughest quarter of the year, but spring should be only a slight bump in the economic soft landing--a nontraumatic moderating of growth--that many economists see continuing throughout 1995. The hitch in second quarter growth stems primarily from a high level of production in late 1994 and a subsequent slackening in consumer demand, which resulted in a substantial overaccumulation of inventories. Now retailers and wholesalers are keeping orders to a minimum as they attempt to sell off their stockpiles. Inventories totaled about $85 billion in the first quarter, compared to $47 billion in the last quarter of 1994, when demand kept pace with production, said Thomas Carpenter, chief economist at ASB Capital Management here, an investment firm. "I expect to see big [promotional] sales in the second quarter," he said. Sandra Shaber, an economist with the WEFA Group economic forecasting firm, Bala Cynwyd, Pa., said, "We should have reasonably good inventory levels if we get decent Easter sales." Another factor weakening second quarter economic performance is a significant decline in exports to Mexico, which are expected to drop as much as 25 percent for the year, according to several economists. Joel Prakken, vice president of Laurence H. Meyer & Associates, St. Louis, an economic forecasting firm, said the Mexico slump will be felt most strongly this quarter. The economists interviewed generally agreed that Federal Reserve policy makers have raised interest rates enough to slow last year's unsustainable growth while not braking hard enough to bring on a recession. Prakken said that a slow-growing 1995 will be "the pause that refreshes. We should be able to go on for at least another year and a half [beyond 1995] with no recession." Prakken estimated gross domestic product growth of 2.4 percent this year, down from 4.1 percent in 1994. He pegged second-quarter growth at only 1.8 percent. Other economists interviewed projected the annual growth rate between 2.7 percent and 3.3 percent and second-quarter growth at 1.5 percent to 2.5 percent. Job growth is one indicator that has slowed considerably. The U.S. Chamber of Commerce estimates job growth at 1.9 percent in 1995, down significantly from 1994's 3.1 percent, but still quite sound, said Robert Barr, deputy chief economist with the chamber. Retail sales are also lagging. Sales fell 1 percent in February against January, the biggest drop in more than a year, and rose only 0.2 percent in March, lower than the projected 0.4 percent increase. The economists agreed that consumers are buying fewer homes and big-ticket consumer items, which should free up money for apparel. But whether people will decide to go clothes shopping after more than two years of sluggish demand is an open question. Spending on housing and durables has been slowing for several months and apparel does not appear to have benefited, they said. The economists' inflation projections also support the soft-landing forecast. While all of those interviewed expect more inflation this year than in 1994, when the Consumer Price Index rose only 2.6 percent, no one forecast a 1995 CPI increase of more than 3.5 percent. Any number lower than 4 percent is not worrisome, said Maurine Haver, president of the National Association of Business Economists and also president of Haver Analytics, New York. But one economist taking exception to the soft-landing theory was Evelina Tainer, chief economist with Indosuez Barr Futures, a securities trading firm in Chicago. Tainer forecast slowly rising prices this year and then a pickup in inflation in 1996, culminating in a recession in late 1996 or early 1997. Tainer blamed the falling value of the dollar, which she said will raise the price of imports and encourage U.S. companies to mark up prices of products that compete with the foreign goods. "Germany and Japan are not our only trading countries, of course, but [the current depreciation] will raise prices," Tainer said. "Toyota already raised car prices 5 percent." And U.S. companies are eager to boost their prices because "they've just had a lot of years of moderate price increases and they may want to catch up a little bit," she said. Like Tainer, Prakken forecast slower economic growth next year, due largely to a slump in demand for big-ticket items. But he and other economists said the dollar weakness is not a strong enough factor to push inflation to unsound levels and cause a recession.
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