Beyond election day: US fine-tuners looking to nurture steady growth
With the 1984 election behind us after tomorrow, we can expect to hear more serious discussion about where the United States economy actually stands. The steam has clearly come out of this recovery. This fact alone does not make recession in the next few months inevitable, or even likely. But the degree to which the growth rate has come down is clearly disturbing to those who for policy reasons would like to see steady and uninterrupted economic growth.
To have Treasury Secretary Donald Regan and his undersecretary, Beryl Sprinkel, suggesting that the Federal Reserve should get interest rates down another notch does not sound like election politics. It comes too late in the campaign to have political effect (if, for instance, one was thinking of blaming the Fed for something); instead, there must be genuine concern that the economy is easing too much.
The October jobless rate, reported on Friday, remained at September's 7.4 percent level. Still, 350,000 new jobs were created during the month. On the other hand, during the last reporting week, initial jobless claims rose some 34, 000, to 426,000. This is the first time since last November that that figure has been above 400,000.
Other evidence last week was also mixed. The leading indicators were up modestly, 0.4 percent, but were revised downward for August. The August revision made three months in a row they were in minus territory, which normally signals a weaker economy if not actual recession. This alone may account for the public lecturing of the Fed.
Construction spending rose a modest 1.1 percent in September. But the components of this number show the effect of the high mortgage interest rates - apartment building was up 4 percent and nonresidential construction 5.5 percent, while single-family homes were off 2.6 percent. It is this latter category that reacts most swiftly to changes in interest rates.
New orders for manufactured goods were off 1.8 percent in September. A good part of the decline was in defense orders, however, which vary from month to month, while new orders for capital goods (nondefense-related) were up 4 percent.
An economy in which some sectors slow down while others maintain or gather new strength is not all bad. If everything was shooting skyward at once, this would increase pressure on the credit markets. Inflationary fears would rise, and so on. Gains in personal income have continued strong during the fall, and consumer confidence would appear to be one of the things contributing to Republican confidence tomorrow. Nevertheless, the areas of slowdown need to be watched closely. For the most part, they are linked to the credit markets - to the availability and cost of credit.
In the weeks after the election, one should expect to hear more about approaches to the federal budget deficit, an indirect result of which is the overvalued dollar and the imbalance in exports and imports. The US had its second worst monthly trade deficit in September, and the year's trade deficit could come in as high as $130 billion, almost twice the $69 billion record set last year.
On the international scene last week, OPEC's agreement for the partners cut back oil production by 1.5 million barrels a day will test that organization's ability to discipline itself in the coming weeks. Weakness in oil prices, which have not even been adjusted for inflation the last couple of years, indicates how anemic the rest of the world's recovery still is. It is also one reason for thinking inflation is not a concern for 1985.
Keeping the US recovery going is not exactly a worry at this point, but there is more reason to be concerned about that than inflation. So, Mr. Volcker, would it be possible to...?