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Further interest rate cuts not needed, CBO says But some experts disagree with the budget office.


WASHINGTON -- Despite depressed consumer demand and continuing high unemployment, the economy doesn't need further stimulation from interest rate cuts, the Congressional Budget Office said yesterday.

Its cautious but reassuring assessment that the economy is on "the verge of sustained recovery" coincided with government figures showing the Consumer Price Index rose only 0.1 percent in July, helped by moderate energy prices and declining food costs. During 1991's first seven months, inflation ran at an annual average of 2.9 percent.

Retail sales, meanwhile, rose only 0.5 percent in July after declining 0.3 percent in June -- a report that disappointed economists and demonstrated consumers' lack of confidence and spending power.

With the data indicating so few signs of economic life, the assertion of the Congressional Budget Office (CBO) that the economy will not need any more interest rate cuts surprised some economists.

One of them, Paul W. Boltz, of T. Rowe Price Associates in Baltimore, said: "We are locked into a sluggish period here, where the economy just doesn't have a lot of vim and vigor. . . . I think the Federal Reserve will ease a touch further."

The CBO's updated economic outlook and yesterday's economic figures will bring little electoral cheer to President Bush. "The economy still struggles to shed the shackles of recession," the CBO said.

But it went on to predict a self-sustaining, modest recovery.

The budget office predicted fourth-quarter economic growth of 2.5 percent, increasing to 3.2 percent next year, half the usual growth rate in the first two years of recovery.

Such slow growth will prevent any rapid drop in unemployment, forecast to average 7.5 percent this year and drop to an average 6.8 percent next year. It is also unlikely to spark inflation, with the consumer price index rising about 3.3 percent this year and 3.4 percent in 1993.

The latest government economic data illustrate the economy's vicious circle.

The 0.5 percent increase in retail sales showed that consumers are going to the malls, but the 0.2 percent decline in real earnings reflected the lack of cash in their pockets.

"We talk about consumer confidence, but the fact of the matter is the problem is not confidence. People are quite willing to spend. They just don't have the money," said David Wyss, economist with Data Resources of Boston.

The consumer's failure to spend freely is helping hold prices down, confirming that inflation is no short-term threat. But the lack of demand and low prices are putting a damper on production and employment.

As a result, new jobless claims remain above the 400,000 mark. To make any real inroads into the 7.7 percent unemployment rate, new claims must drop below 350,000.

Without more hiring, there is only one other way to increase national earnings -- pay raises. In such a weak economy and with corporate down-sizing the order of the day, neither workers nor management see much prospect of those.

As Mr. Wyss said: "We may not have growth, but we don't have inflation. . . . It should set the stage for growth sometime in the future, but I'm afraid it's not today's story."

Here's a summary of yesterday's government statistics:

The 0.1 percent increase in the Consumer Price Index marked the third time this year that retail-price inflation has posted such a tiny increase, leaving inflation for the year at an annual rate of 2.9 percent. July's performance reflected a return to moderate energy price increases following a big spike in June and the third monthly drop in food costs.

Retail prices in the Baltimore area rose 0.8 percent for the two-month period ended July 1992, the government reported.

Strong increases in housing and medical care were nearly offset by a sharp seasonal decline in apparel.

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