Fears About Relapse of US Recession Are Overblown

By , H. Erich Heinemann is chief economist of Ladenburg, Thalmann & Co., investment bankers in New York.

CONGRESSIONAL Democrats, together with their agents in the fourth estate, have launched an all-out assault on George Bush. The New York Times solemnly intoned that "the recovery had already started to lose momentum by Labor Day." At best, that was a half truth.Consumer spending, which accounts for two-thirds of the economy, posted a nice increase in September and for the third quarter as a whole. Measured in constant 1982 dollars, business investment in machinery and equipment rose $15.7 billion during the summer months, a 17 percent annual rate of gain. Productivity is going up, as are corporate profits from domestic operations. While the threat may seem remote at present, the big danger is that the White House and Congress may force easy money on the Federal Reserve System. That would set the stage for renewed inflation in 1993 and 1994. At present, the economy is indeed growing slowly. Symptoms of slowdown are easy to see. Employers added 1.1 million workers to their payrolls over the past three months. However, that gain was normal for this time of the year. Therefore, seasonally adjusted, employment and income rose only modestly. Even so, there is no reason to expect the current flat spot in the economic recovery to turn into a renewed downturn. Propaganda from the White House notwithstanding, Fed chairman Alan Greenspan has added generously to the money supply during 1991. Total bank reserves (the raw material for the money supply) were up 9 percent in October from a year earlier. In the year ended October 1990, reserves rose only 1.4 percent. Private service firms, which account for most of the growth in US employment, have hired 360,000 new workers (seasonally adjusted) since the end of the recession. That was a subpar rebound, but it was a significant step in the right direction. Even the manufacturing sector, much maligned in recent weeks, is doing OK. New orders for all types of manufactured goods rose at a rate of more than 17 percent in the third quarter. Some of that gain was due to a record bulge in orders for jet aircraft and military hardware in early summer. Excluding those products, new orders were up at a rate of almost 12 percent, with a good gain in September. Nonetheless, consumers are caught in the political cross-fire. They are beginning to get frightened. Consumer confidence is down, though nowhere near so much as recent scare headlines would suggest. Sales of new homes and automobiles - normally the spark for recovery - appear stalled at relatively low levels. However, purchases of other goods and services (the vast bulk of total consumer spending) are going up. Investors and politicians should consider two major risks: First, as New York Times columnist William Safire would put it, consumers could succumb to the "nattering nabobs of negativism" on the nightly news and really retreat. This actually happened in the spring of 1980 when President Carter told Americans to cut up their credit cards. Gross national product posted the sharpest one-quarter drop since the Great Depression. Second, if the Federal Reserve succumbs to political pressure and floods the economy with money, long-term interest rates will rise. This ultimately happened in the early 1970s. President Nixon devalued the dollar, imposed price controls and talked the Fed into pumping up the money supply. Things were still going nicely on Election Day in 1972, but a year later inflation was raging, rates were up and the economy was on the road to a severe downturn. The most encouraging bit of economic news last week was the increase in business investment in machinery and equipment, which was modest in the second quarter and substantial in the third. The long-term rate of growth in the United States economy has been below par for two decades, largely owing to rising corporate taxes (implicit and explicit), a substandard rate of return on capital, and thus a long-term decline in net investment as a share of net national output. A cyclical rebound in business investment will not solve the basic problems of underinvestment and slow growth. However, every bit helps. The toolbox that American workers use to produce goods and services is too small. It must grow faster for the nation to achieve reasonable standards of growth and prosperity.

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