Business may adopt a holding pattern while waiting for Congress
THERE is an axiom that a dynamic economy cannot long suffer low growth. Growth either picks up or the economy dips into recession. This is the situation in the United States today. The axiom is not necessarily true, but there are some elements of truth to it. For instance, let's start with the rate of unemployment. For decades this country has enjoyed a rate of productivity growth for nonfarm labor of about 3 percent. That means that for each hour worked, a worker has produced 3 percent more goods than the year before. That rate has recently been lower. The point is that any productivity growth means the same goods and services can be produced each year with fewer workers, or with the same number of workers being employed fewer hours. Thus, a situation in which an economy is growing at close to zero will in time lead to layoffs of workers and growing unemployment. And that, in turn, would lead to less spending and finally to cutbacks by business.
The kind of statistics that have been coming out for several months now suggest an economy slowing to the point where joblessness could increase. (The December jobless rate will be announced this Wednesday.) The nation has just had a disappointing Christmas selling season. The major chains had modest sales increases. Most goods were moved at substantial markdowns, which means profits will be unsatisfactory. Some parts of the country even seem to be overstocked with retail stores, which could lead to a shakeout of some of the weaker chains.
In statistics released last week, crosscurrents were again evident. Sales of new houses were down 10 percent in November. This decline occurred after two strong months but is still cause for concern since interest rates had also been dropping during the fall. Lower rates should have led to more home sales, not fewer. On the other hand, factory orders for durable goods rose 4.3 percent in November. A good part of this rise was in military orders, but there was strength elsewhere as well. Moreover, the military orders have to be counted; they are one of the end results of the arms buildup and the massive federal budget deficits.
David Stockman, President Reagan's bad news man (actually head of the Office of Management and Budget), went up to the new 99th Congress and said the budget deficit would be a bit worse than predicted. It seems evident that Republican leaders in the Senate will take the budget into their own hands if the President sends up a document that doesn't address the deficit dilemma seriously and in a politically feasible fashion -- that is, with military cuts to balance the domestic cuts.
The Republican leadership in the Senate is talking about some kind of freeze, including temporary elimination of cost-of-living increases for social security recipients. Sen. Robert Dole (R) of Kansas denies that he and the White House are on different wavelengths. Whatever that may mean, Senator Dole himself has been quoted as saying that some kind of freeze will be the ``centerpiece'' of the new budget.
Until the budget is presented at the end of this month, businesses and the financial markets are apt to be in a holding pattern -- which, of itself, will be bad if it goes on for many weeks. With the economy not growing strongly, any decisions to postpone inventory purchases or to proceed with capital spending would further depress growth. Thus, it is important that the real budget discussion be initiated quickly, just as it is that the sweeping tax-reform proposals of the Treasury be laid to rest.