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US: sizing up the recovery

By Harry B. EllisSenior economics correspondent of The Christian Science Monitor / March 3, 1983



Washington

How reliable are the signs that the US economy finally has left false starts behind and is on the way toward solid growth? That question emerges from a fresh batch of government economic measurements, almost all of which are optimistic.

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The latest figures, says Martin Feldstein, President Reagan's chief economic adviser, ''are very good and very broad. But I would like to see another couple of months (of results) before jumping to conclusions.''

In January, reports the US Commerce Department, the government's index of leading economic indicators - designed to show future economic trends - jumped a dramatic 3.6 percent, the highest monthly rise since 1950.

This was accompanied by a 0.6 percent increase in another key measurement - the coincident indicators - designed, Dr. Feldstein says, ''to show where the economy is now, not where it is going.''

''I would like to think,'' he said in a phone interview, ''that (these figures) confirm the strength of economic activity.''

''There has never been a gain in the leading index this large in the past,'' said Commerce Secretary Malcolm Baldrige in a statement, ''without an economic recovery.''

Like Feldstein, Mr. Baldrige cautioned against interpreting the January figures as heralding an ''economic boom.''

With inflation continuing to slow down, the new statistics strengthen the view that the economy may grow this year somewhat faster than the 3.1 percent forecast by the White House in January.

Many experts in and out of government say they expect the economy to grow at a 4 percent rate without reigniting inflation.

On March 4, Americans will learn to what extent unemployment may be responding to improved conditions, when the government releases employment data for February.

Feldstein drew attention to the three main components of the coincident indicators - employment, industrial production, and real personal income - all of which grew in January.

Twice last year, he notes, this key index rose - in February 1982 by 1.2 percent and in May by 0.7 percent. Both times proved to be flukes and the recession deepened.

He expressed hope that January's 0.6 percent increase will not turn out to be ''the kind of false start we saw in February and May of last year.''

The stock market, meanwhile, advanced broadly Wednesday on the strength of the January index figures. The current bull market has carried the Dow Jones average to a record high. Clearly the investment community discounts inflation as a serious threat for some time to come. From that conclusion springs another - that interest rates are likely to drop in coming months.

Declining interest rates and low inflation, coupled with the prospect of economic recovery, tend to make stocks more attractive to investors looking for long-term growth.

Slumping oil prices also spur hopes that the US may be in for a period of sustained, noninflationary growth.

The world's oil-producing nations, spearheaded by the 13-member Organization of Petroleum Exporting Countries, are probing to find a price level the market will support.

Most OPEC ministers hope to anchor the cartel's official price not far below

To prevent prices from slipping lower, cartel members must persuade Britain, Norway, and Mexico - all nonmembers of OPEC - to adhere to pricing and production standards set by the cartel.

It is not clear this can be done, nor in fact that Nigeria, currently an OPEC maverick, will bow to the demands of its cartel peers.

Nine out of 10 of the leading indicators advanced in January, pushing the composite index to its fastest monthly rise in more than 30 years. Among the key improvements were a lengthening of the average work week, fewer new claims for unemployment benefits, and increases in building permits, orders for consumer goods, and stock prices.

The money supply also grew sharply, but that, said Feldstein, may be distorted by ''a very substantial shift of funds in January'' from one type of account to another.

The only leading indicator to decline was new orders for plant and equipment. Corporate plans for capital investment are down this year, partly because so much existing factory capacity stands idle.