It is probable, but not yet certain, that the United States is in a recession.
The highly regarded Research Seminar in Quantitative Economics of the University of Michigan recently estimated that real gross national product declined at an annual rate of four-tenths of 1 percent in the July-September quarter.But the Federal Reserve Board reports that, helped by a jump in auto sales, industrial production rose two-tenths of 1 percent in September, and it revised its figures upward for July and August, showing a slightly rising trend for the third quarter.
The basic trend in the overall economy right now can be described as wiggling around zero.
The consensus forecast of the 50 economists surveyed by Blue Chip Economic Indicators calls for real GNP to decline six-tenths of 1 percent in the current quarter and one-tenth of 1 percent in the first quarter of 1991, which would technically make it a recession.
But the consensus calls for recovery to start in the second quarter of 1991 and pick up gradually as the year wears on.
There is still some chance, however, that we can pull ourselves out of the current morass. Most important, the Fed is likely to bring down interest rates once a budget agreement between the administration and Congress is set.
The Fed is worried about a credit crunch that could dump the economy into recession and crack its financial structure.
In his congressional testimony last July, Alan Greenspan, Fed chairman, said:
"We have been closely watching various interest rate spreads and other indicators to determine if the pulling back of commercial banks to less lax lending standards is moving over the line, so to speak, and in effect creating a tightening in credit markets independent of actions by the Federal Reserve."
His conclusion: a tightening "of modest dimensions may be occurring."
Since then, the danger to borrowers and banks alike has increased. As James J. O'Leary, economic consultant to the U.S. Trust Co. of New York, puts it, "Many commercial banks and life insurance companies, including many large ones, are seriously undercapitalized, raising the risk of insolvencies as large loan losses continue."
Strapped for reserves, and nervous about non-performing loans, many banks are turning down borrowers who once would have been considered creditworthy.
A tightening of private credit has the same impact on the economy as a tightening by the Fed, as Greenspan has made clear.
To prevent the system from seizing up, and falling, many businesses say, the Fed should make more reserves available and bring down interest rates.
After the lending binge of the 1980s, the restoration of stricter lending standards is necessary and healthy.
But the Fed is now worrying about signs that the banking system is contracting more than it should and endangering the economy.
The gulf crisis and the surge in oil prices have stirred both recessionary and inflationary fears.
But higher oil prices have also spurred spending in the United States for oil drilling and production.
And, assuming no further acceleration in oil prices or, preferably, a continuation of the decline that set in this week, the prospects of recovery in 1991 will be strengthened.
The biggest risk to this forecast of sluggish growth or moderate recession through the rest of this year and early next year, followed by a gradual recovery, is the threat of a financial crisis that would result if several major banks were to go under.
But it is unlikely that the Federal Reserve, Congress and the administration would permit that to happen.
This must be the best-advertised, most carefully watched financial contraction ever. That in itself may help to keep it from becoming an economic catastrophe like the one in the early 1930s.