Sustaining recovery: consumer spending, interest rates are keys
Washington — Four broad areas of the economy continue to give analysts pause as they try to assess how strong and durable the recovery will be. First is the sluggish pace of consumer spending, which indicates that millions of Americans have not shrugged off the caution bred into them by years of inflation and recession.
Good news about brisk housing sales masks the fact that overall retail sales have been flat, and in some cases declining, through February of this year.
New car sales, which had begun to pick up steam, leveled off early this year and now are falling behind Detroit's rate of production.
Just as wages and salaries make up two-thirds of the nation's income, so consumer spending on goods and services accounts for more than 60 percent of all economic activity. A strong and sustained recovery depends on solid retail sales.
A related concern is the cumulative decision by US businessmen, as reported in surveys of planned capital outlays, to spend less this year than last to upgrade plants and equipment.
The decision is understandable, given the amount of factory space and machinery that now stands idle in the wake of the deepest recession since World War II. Businessmen want to put some of that existing capacity back to work before investing in something new.
However rational this may be, weak corporate spending deprives the recovery of a wide base of support on which to build.
A third area of concern is the performance of interest rates, which appear to be stuck on a plateau still too high to generate rapid economic growth.
No one expects the Federal Reserve Board to throttle the recovery by starving the economy for money. But Fed chairman Paul A. Volcker clearly mans the barricades against the threat of renewed inflation.
''A long sustained expansion in the economy,'' he told the House Budget Committee, ''will depend in major part on our success in maintaining the progress against inflation.''
This boils down to a Fed policy, so far as analysts can discover, of feeding the economy enough money to accommodate, or sustain, a moderate recovery, but nothing faster.
With the money supply growing well above its target ranges, Mr. Volcker and his fellow Fed governors appear to be ''snugging up'' a bit, in the bankers' jargon - that is, slowing the flow of reserves into the banking system.
Against this background the prime rate appears unlikely to drop below the present 10.5 percent. Some other interest rates have risen slightly in recent weeks.
Borrowers, meanwhile, pay a huge ''spread'' between banks' cost of funds and the rates they charge customers for loans.
With inflation running about 3 percent, consumers pay from 14.5 to 18 percent interest on money they borrow to buy cars or goods on the installment plan. Home builders pay a couple of points above prime.
Real interest rates, in other words, are still very high - too high to generate rapid economic growth, many analysts concur.
Officials who are concerned about the possibility of future inflation - including Volcker and chief White House economist Martin S. Feldstein - do not want too-rapid growth. A 4 percent growth rate for the economy this year, possibly up to 5 percent, would do nicely, in their view.
This would not do much to reduce unemployment. It takes a growth rate of 3 to 4 percent simply to accommodate the growth of the labor force and hold the jobless rate steady.
A final area of concern involves the strength of the dollar and the fact that the United States is pulling out of the recession faster than its major trading partners, both in Western Europe and among developing countries.
A strong dollar makes US exports expensive. Also, when other nations' economies are in the doldrums, their governments try to restrict imports. Conversely, a quickening US economy opens the American market to more goods from overseas.
The important export sector of the US economy, which employs millions of people, is likely to lag behind other sectors in shaking off recession.