Reading Election Tea Leaves

By Charles P. Alexander

Strong growth and low inflation boost the President's campaign

The Republicans will not open their convention until Aug. 20, but on one front their election drive was already off to a roaring start last week. The Government released economic statistics that could hardly have pleased Ronald Reagan more. From April to June, the gross national product grew at a 7.5% annual rate, after adjustment for inflation. In the past 18 months, the U.S. has enjoyed the strongest recovery since the boom that followed the recession of 1949. And at the same time, inflation has slowed. Consumer prices, which have risen at a modest 4.1% annual pace during the first half of the year, increased at a 2% rate in June. That combination of high growth and low inflation is the best economic performance in two decades.

Economists have found some evidence for the politicians' bromide that people vote their pocketbooks. In one study, Robert Wescott and Miriam Goldberg of the Wharton Econometrics consulting firm in Philadelphia compared the outcomes of presidential elections from 1948 to 1980 with what was happening to real disposable income, which is the amount of money people have after taxes, adjusted for inflation. Over those years, the average annual rise in real disposable income was 3.8%. Wescott and Goldberg discovered that, coincidence or not, whenever the growth in income topped 3.8% for the twelve months before the voting, the party in power invariably kept its lease on the White House. But whenever the rise in income was only 3.8% or less, the voters sent the incumbent party packing.

In 1980, for example, income increased a meager .5%, and Reagan swept

Jimmy Carter out of office. But in 1964 income jumped 6.9%, and President Lyndon Johnson trounced Barry Goldwater. For 1984, Wharton Econometrics predicts that real disposable income will advance 6.2%. Says Wescott: "Historical analysis suggests that the economic playing field is tilted quite heavily in the incumbent's favor this time." Michael Evans, an economic consultant in Washington, is less cautious about his political forecast. "It is a landslide for Reagan," he says.

The most serious risk to Reagan's election-year economy is the possibility that the rapid growth in private credit demand and this year's projected $175 billion federal budget deficit will push up interest rates. During the late winter, the Federal Reserve Board, fearful that the rapidly expanding economy would set off new inflation, slowed the growth of the money supply slightly and helped push the prime rate that banks charge corporate customers from 11% to 13%. In testimony before Congress last week, though, Federal Reserve Chairman Paul Volcker said that in view of recent inflation reports, he saw no need for further tightening at the moment.

The economy's rousing performance in the face of towering interest rates has stunned and puzzled economists. Most predicted growth of no more than 4% to 5% this year. But many Americans are apparently still eager to buy houses, cars and appliances out of fear that inflation may speed up again and interest rates could climb further.

Several forces have helped businesses hold down prices. With memories of the recession fresh, workers have been moderate in their wage demands. Over the past twelve months, average hourly earnings have increased only 3.2%, after rising 7% in 1982. In addition, ample world oil supplies have kept energy costs stable.

Perhaps the most important check on inflation is the high value of the U.S. dollar, which has been setting records against the British pound and other major currencies.

The rising dollar has made imports cheap and forced U.S. companies to keep their prices low to meet foreign competition.

Some economists fear that the U.S.

could be headed for a slowdown or perhaps even a recession next year. Says Walter Heller, an economics professor at the University of Minnesota: "In the second half 1985, there could be all kinds of trouble be cause of several time bombs -- high interest rates, the huge deficit, fragile banks and Third World debt." Agrees William Gross, the managing director of Pacific Investment Management in Newport Beach, Calif.: "A deficit-financed boom is not a healthy, long-lasting one."

In the coming campaign, the Democrats will argue that the Reagan deficit has fueled a false and temporary prosperity.

Candidate Walter Mondale will charge that the swift buildup of the national debt will place an intolerable burden of interest payments on future generations. But the trouble he foresees may not surface until long after Election Day. Says Economist Barry Bosworth of Washington's Brookings Institution: "The Democrats are right to be concerned about the long-term implications of the federal budget deficit, but I doubt that the average voter will be thinking very much about the economic situation that his children will inherit." Instead, Americans are likely to go to the polls thinking about the swift growth and slow inflation that have ben the hallmarks of the economy of 1984.

-- By Charles P. Alexander. Reported by Gisela Bolte/ Washington and Lawrence Mondi/New York

With reporting by Gisela Bolte; Lawrence Mondi