ONE thing we are certain to say about this business cycle is that it is unique. Normally, three years into an expansion, interest rates are rising, capacity utilization is up substantially, and rising commodity prices are pushing up the inflation rate. None of these things are happening currently. Interest rates have been coming down for several months, capacity utilization remains stuck in the low 80s (percent), and commodity prices have been dropping for several months.
The Federal Reserve, in loosening up on the credit reins, has given a clear signal that it wants at all costs to avoid another recession right now.
What is going on is a global phenomenon, and it can't be understood solely from looking at the domestic economy. The whole world apparently thought growth would be faster in the 1980s than it has been. But it was extrapolating growth rates from what had been happening during the inflationary 1970s, when business and consumer psychology, stung by the various oil crises from 1973 to 1979, got used to thinking in terms of shortages.
This period isn't going to last forever, either. The hard thing is to pinpoint what may change the outlook for faster growth again. One factor inhibiting growth around the world has been the number of austerity packages imposed by the International Monetary Fund on third-world countries that have substantial foreign debt. There are skeptics who have been saying that the world would have to inflate its way out of the debt that has been created in the banking system. That is, they think there needs to be a major increase in the supply of currencies around the world, which would make it easier to service the debt accumulated when money was worth more.
The problem with such an approach is that there is little evidence to support the theory that one can turn inflation on and off like a faucet. Third-world debt is certainly a major problem, and the banks may not get paid back dollar for dollar. But inflating the world's money supply as a conscious policy does not look like the way out of the problem.
At any rate, the usual preconditions for an economic downturn are not present in the United States today. But the statistics that are coming out every month continue to show how little vigor there is in the economy. Last week the Fed announced that industrial production for July had risen 0.2 percent, and the numbers for May and June were revised upward slightly. But since last summer, the industrial production index has risen only 1.4 percent. Since consumer spending has been strong throughout this period, this shows how they have been fueled mainly by imports.
Another indication of weakness came in the June combined sales figure for retailers, wholesalers, and manufacturers. Their sales were down 2.1 percent, the largest drop since this statistic has been kept, beginning in 1967. Inventories rose during the month by 0.4 percent. Combined with weak sales, this indicates that business may be trying to unload inventories in the coming few months.
July retail sales were also weak. They rose 0.4 percent from June, but were below their average level for the entire second quarter. General Motors' offer of 7.7 percent financing on its 1985 cars, or the June increase in installment debt of only $6.8 billion (it had been running at the $8 billion-to-$9 billion level), confirms the slowdown on the consumer side.
A recession soon? Probably not. But continued weakness in the manufacturing sector, strong imports, and a consumer who is no longer in a rush to buy must be giving the Fed plenty to think about.