Vigor in US economy suggests any pullback would be moderate
Economic statistics released last week continued to validate the flash estimate of strong second-quarter growth in GNP. While we should be enjoying the brisk expansion, one must at the same time ask whether today's high and rising interest rates are consistent with further expansion of the economy, or if the United States faces another recession by 1985.
Before we examine that question, let's be clear about one thing. There are many kinds of recession. The last two recessions have been the most severe of the postwar period (during which there have been eight business cycles). There are several discrete elements to be measured in assessing the state of business; but the increase in unemployment alone in those two recessions marks them as the most severe in the public's mind. No one today is predicting that kind of recession the next time around.
The question economists have is whether, given the present mix of fiscal and monetary policies and the apparent strength of this recovery, the economy can keep to its growth path without a stumble. Most of the economic news this past week indicated continued strength. New orders for manufactured goods in May rose by 1.9 percent, after a drop the previous month. New construction spending also rose during the month of May by 1.8 percent, after dropping in April. High interest rates are impeding home construction, but commercial and industrial building continues apace. Such spending is less immediately affected by rising rates for at least two reasons: There is a lead time in planning such projects, and business normally balances the costs of construction, of which interest rates are just one factor, against the expected profits from such projects.
On Friday the Labor Department announced that the unemployment rate in June dipped to 7.1 percent, a decline from 7.5 percent the previous month. Some 460, 000 new jobs were created during June, and since the bottom of the recession in November of 1982, 6.5 million new jobs have been found. Almost 106 million Americans are now at work in civilian jobs, a record high. These are extremely strong gains. They demonstrate a resilience in the US economy that is not matched in the more managed economies of western Europe.
A. Gilbert Heebner, executive vice-president and economist of the CoreStates Financial Corporation in Philadelphia, asks in that bank's monthly bulletin how long the present expansion can be expected to continue. The average postwar expansion has been about three years, and he thinks this one will be about average in that sense.
It's possible, he admits, that the economy could slow right now because of the high interest rate levels. A mini-recession in 1984 would allow it to grow again in 1985 and beyond. But the evidence that interest rates are hurting enough to make this happen is not persuasive. It's also possible that the economy could continue on a growth path indefinitely - that is, even beyond 1985 . But he reasons that total credit demands in an aging recovery will raise rates to the point where they do take a ''bite'' out of the economy. Moreover, further fiscal restraint is likely when Congress gets down to work in 1985.
Such an analysis does seem to indicate the way things are most likely to go. But neither is even a small recession 18 months from now a foregone conclusion. If the Fed hangs in with a consistent approach to monetary policy, the inflation premium in today's interest rates would finally decline. Moreover, the robust recovery in the US is beginning to be felt in economic growth elsewhere. Later in 1985, that could help keep the US economy going.
It's good to be aware of the nature of economic cycles, but many factors are still too fluid to say when this one will run into trouble.