US economy shows buoyancy, decline at the same time

By , Senior economics correspondent of The Christian Science Monitor

August was a month when the troubled American economy appeared to be moving in opposite directions, both up and down.

On the plus side, the stock and bond markets soared - first in response to lower interest rates, then on a momentum of their own.

Interest rates tumbled - the prime to 13.5 percent, other key rates even lower.

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The index of leading economic indicators, measuring the probable course of the future, climbed for the fourth month in a row.

A bit of strength was reflected in permits for future home construction and in advance factory orders. Inventories in merchants' shelves generally were lean , forecasting stronger demand for goods in the months ahead.

Taken in isolation, these conditions would indicate that the recession which began in the summmer of 1981 has bottomed out, and that the groundwork for recovery has been laid.

Some officials of the Reagan administration in fact claim that recovery is under way. But look at the other side of the coin:

Unemployment in August was 9.8 of the labor force - no higher that in July, but no better, either. This is still the highest mark recorded since 1941.

Business bankrupties, according to Dun and Bradstreet, are running at the highest level since 1932, at the depth of the Great Depression. The bankruptcy rate has risen year by year since 1979, and still is climbing.

Net incomes of American farmers, according to a government study, has slumped to the lowest point since 1933. Sales of cars and new single-family houses are dismal. Retail sales remain sluggish. Cautious consumers are not triggering an early recovery, despite fresh purchasing power pumped into the economy by tax cuts and higher social security benefits.

The fiscal 1983 budget deficit, said the Congressional Budget Office (CBO), is likely to total $155 billion after spending cuts already made and the $98.5 billion tax increase signed by President Reagan.

Deficits will be in the $150 billion range over fiscal years 1984 and 1985, according the CBO, unless additional spending cuts and tax boosts are made.

These figures are more pessimistic than the administration's last estimate -

Taken in isolation, all these things would indicate that the recession continues to deepen. The economy, however, is enormously complex and interwoven. Good and bad unfold together.

The trick for analysts is to figure out and project what the mass of conflicting data appears to be telling us about the future.

This is an uncertain business, evidenced by economists' widely differing interpretations. A consensus does exist that the recession should begin subsiding later this year, certainly by the fourth quarter.

Within that consensus the weight of opinion leans toward a fragile recovery, with unemployment remaining high and interest rates threatening to climb again.

A robust recovery is ruled out by many experts on the grounds that competition between the US Treasury and a vigorous private sector to borrow money will drive interest rates up. When rates reach a certain point, the economy cools.

Also within the consensus runs a strain of deep concern about the stability of the world banking system, stemming from a huge overhang of debt owed by developing countries, epitomized at the moment by Mexico, and by the nations of Eastern Europe.

Default by one of these could lead to default by others, causing US and European banks to lose billions of dollars. Most experts believe the international banking system is strong enough to weather what may be coming, but uneasiness exists.

A proof of this is the sudden upsurge in gold prices, as investors flock to put some of their holdings in the precious metal. The attraction of gold as an investment increases in direct ratio to doubts about the world's economy.

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