TRADE DEFICIT FORECAST TO FALL TO SINGLE DIGITS

TRADE DEFICIT FORECAST TO FALL TO SINGLE DIGITS

The United States will report some single-digit trade deficits in the next few months, which will help support the dollar, Richard B. Hoey, managing director and chief economist at Drexel Burnham Lambert, said Thursday.

Mr. Hoey said the dollar could still go to new lows, but not in the next several months.U.S. exports will remain very strong in the near term, the Drexel Burnham economist told reporters at a breakfast meeting. However, he added, export growth could begin to decelerate by the middle of this year, creating a front- loaded improvement in the U.S. trade deficit.

He predicted the monthly deficit will average $10.5 billion in the first half of 1988, and about $12 billion in the second half, well below the monthly

average of $14.2 billion for 1987.

Foreign economic growth rates have been good, and our trading partners can take our exports, Mr. Hoey said, pointing to major demand for U.S. exports

from Japan and other Pacific Basin countries.

And the high level of retail inventories means some imports will be canceled, which will help improve the trade deficit over the next few months, he added.

He said the February deficit, to be reported next week, might not be in single digits, but a single-digit deficit is coming in the next few months.

The United States is undergoing a transition from importing consumer goods to importing capital goods, the Drexel Burnham economist said.

Weakness in imports of consumer goods in the early part of the year will most likely be followed by strong imports of capital goods and oil in the second half of the year, he predicted.

The late year rebound in imports, combined with a deceleration in export growth, could temporarily reverse some of the early-year improvement in the trade deficit, he added.

Mr. Hoey forecast strong consumer demand in the second half of this year, with no U.S. recession before 1990.

We do not believe the business cycle has been repealed . . . but rather that this cycle will be characterized by having a classical beginning, a prolonged middle and a classical end, he said.

It will take some time for inflation to get high enough for the Federal Reserve to trigger a recession, Mr. Hoey said. Not until an inflationary acceleration is well under way will public opinion support aggressive actions to fight it.

In a recent poll of 330 institutional portfolio managers, Drexel Burnham found nearly 90 percent expect a recession by the end of 1989. The 90 percent are going to be wrong, Mr. Hoey said.

He forecast a credit crunch by the end of 1989 and a full-scale recession in 1990. The recession is not likely to be longer than normal, he added.

From now through the end of 1989, there will be an easy-money rise in interest rates, where the market moves rates higher and the Fed follows, Mr. Hoey said. Long-term U.S. Treasury bonds, now yielding about 8.78 percent, will be yielding above 9.5 percent by the end of this year, he added.

Mr. Hoey said the Fed has re-tightened since the February easing, and that the Fed may go a little further than merely taking back the easing move.

Noting that the U.S. trade deficit is improving faster than the current account deficit, he said, We expect the cost of servicing the growing U.S. international debt will continue to rise by about $10 billion to $12 billion each year over the foreseeable future.

Because of this continued net debtor position, the dollar still may fall to new lows later this year, he said.