US recovery still surprising the forecasters

The strength of the American economic recovery continues to surprise forecasters, many of whom have been scrambling, once again, to boost their predictions for the last half of 1983.

A key reason for the revisions is that new statistics show companies are churning out goods and rebuilding inventories of products for sale at a faster clip than economists had expected.

''The economy is still smoking,'' says Edward Yardeni, senior vice-president and director of economics at Prudential-Bache Securities. This week he dropped objections to the Commerce Department's preliminary estimate that the economy grew at a 7 percent rate in the third quarter.

A revised figure on gross national product for the period is due tomorrow, and some economists, including those at the National Association of Manufacturers, now predict the government will have to boost its third-quarter GNP figure to 8 or 9 percent.

New signs of robust growth as the July-to-September period drew to a close prompted Donald Ratajczak, director of the forecasting project at Georgia State University, to boost his growth estimate for the fourth quarter from 4.5 to 6.1 percent. ''When you end a quarter with that strength,'' the outlook for the coming months improves, he notes.

The faster-than-expected pace of production means more unemployed Americans will be going back to work and that the nation's supply of idle factories will continue to shrink. In fact, factory use in September was at its highest level in two years.

Economists say that as executives see their idle plants returning to work, business spending for new facilities and equipment, which has been lagging, should rebound, sustaining the recovery.

''We are getting near the point'' where most companies will begin considering spending for new facilities and equipment, says Robert Scott, an economist at Chase Econometrics, a forecasting firm.

The rule of thumb is that companies generally start investing when they are using 80 percent of their capacity. In September, capacity utilization for the nation as a whole was 78.1 percent.

But economists can find a cloud behind every silver lining. Some forecasters worry that unless businesses follow through on spending plans, the nation could run into capacity shortages as early as the middle of next year. Production bottlenecks could trigger a round of price inflation that could help choke off the recovery.

''I think there is a danger as we get into 1984 that capital spending won't pick up sufficiently,'' says Bert Dohmen-Ramirez, president of Wellington Financial Corporation, a Honolulu-based investment advisory service. He notes that executives may hold off on capital spending because they are concerned about the duration of the economic recovery.

''So instead of building new capacity, businessmen will say if everyone wants our goods so badly, let's raise prices.''

Economists have traditionally reckoned that inflationary bottlenecks would not arise until some 85 percent of the nation's factory capacity was in use. Getting to 100 percent utilization is not a practical possibility, since it would involve using old and inefficient facilities.

''There is a tendency for people to ignore the possibility (of a problem) for next year,'' says Priscilla Luce, an economist at Wharton Econometric Forecasting Associates. ''If things keep booming, we could get surprised.''

Other economists agree there is a danger but contend it is much further down the economic road. ''The prospect for reaching difficulty is in 1985 rather than in 1984,'' says Edgar Fiedler, vice-president and economist at the Conference Board, a business research organization.

Much of the dispute centers on how much capacity is on hand and how much can be added in the near term to avoid price pressures. It is difficlut for the Federal Reserve System, which tracks capacity, to know when each old plant is shuttered and when each new facility is opened. The problem was compounded in the past recession by the quick closing of factories when the business was unprofitable.

''How much of that is really available for reopening and how much of it is not? No one can really answer,'' says Chase economist Scott. If prematurely closed plants are opened, it will reduce inflationary pressures. Capital spending for new facilities and equipment is the other factor in determining when the nation's factories will become overtaxed.

''Capital spending is very much one of the big 'ifs' in the continuation of the recovery,'' says Robert Gough, senior vice-president of Data Resources Inc., a forecasting firm. While businesses have started to spend, ''it is still at a below-average level'' because of the already heavy debt levels many companies are carrying, he says.

The major forecasters surveyed by Blue Chip Economic Indicators, a Sedona, Ariz., newsletter, expect business capital spending to climb 3 percent this year from depressed year-earlier levels and to rise an additional 11 percent next year.

About these ads
Sponsored Content by LockerDome

We want to hear, did we miss an angle we should have covered? Should we come back to this topic? Or just give us a rating for this story. We want to hear from you.

Loading...

Loading...

Loading...

Save for later

Save
Cancel

Saved ( of items)

This item has been saved to read later from any device.
Access saved items through your user name at the top of the page.

View Saved Items

OK

Failed to save

You reached the limit of 20 saved items.
Please visit following link to manage you saved items.

View Saved Items

OK

Failed to save

You have already saved this item.

View Saved Items

OK