Recession May Be Here - But Is Economy More Stable?
OVER the past several months, economic opinion on the fate of the United States economy has swung sharply. In May and June, the statistics persuaded many economists that a recession was in the works. As new and revised numbers came along in July and August, the consensus changed to a soft landing. Some economists even talked of a re-acceleration.
Now the common view is swinging back rapidly to recession - but a mild one.
``Output should drop sharply in the fourth quarter,'' says Karen Moeller, an economist with the Prudential Insurance Company of America. Her economic shop, by the way, has for 18 months been saying consistently that the US economy had a 50-50 chance of falling into a recession in the second half of 1989.
What prompts today's increased pessimism was the week-old news of a sharp decline in factory jobs pushing the nation's civilian unemployment rate to 5.3 percent in September from 5.2 percent in August. That combined with other evidence of a further slowdown.
Leonard Lempert of Statistical Indicator Associates in North Egremont, Mass., finds 17 of the 25 statistical indicators he tracks behaving in a manner related in some way to a recession. So far, though, he sees only a 4 in 10 chance of the economy falling into a real recession before 1990.
Corporate profits are also slackening. In the first two quarters of 1989, after-tax profits from current production actually declined. Third-quarter company statements suggest that no revival from this slide will happen soon. American companies are being squeezed by poor sales and rising wage and benefit costs.
Despite growing evidence of a further slowdown, the stock market (at this writing) has not reacted substantially. Though cautioning that stock prices are not a perfect economic forecaster, Mrs. Moeller expects ``some small correction.''
Economic output, she predicts, will revive to a 2 percent real annual growth rate in the first half of 1990, after dropping at a 0.5 percent rate in the last half of 1989. Considering that real growth in gross national product may have been slightly positive in the third quarter, that forecast implies a solid decline this quarter and possibly in the first quarter of 1990.
Why should the economy snap back so nicely, avoiding a serious recession like those that occurred in 1973-75 or 1981-82?
Moeller figures it is because the Federal Reserve System in the last several years has moved early to restrain inflation by tightening credit before - not after - it reaches a politically intolerable level. She is counting on the Fed easing monetary policy soon when further numbers confirm a slowdown.
In the meantime, financial markets are full of speculation as to when the Fed will ease. When Fed Chairman Alan Greenspan suggested in Moscow Tuesday that lower interest rates may not be the long-term solution for the strong dollar, a bond rally came to a halt. He warned that in setting monetary policy, ``inordinate attention to some types of intermediate targets,'' such as the level of exchange rates or interest rates, ``may not promote the attainment of long-term goals.''
In any case, Prudential anticipates a decline in short-term interest rates (Treasury bills) from the current 7.6 percent to 7 percent by year end, and in long-term rates (30-year Treasury bonds) from 8 percent at present to 7.8 percent. That would rally bond prices a bit. And lower interest rates would stimulate economic recovery.
Sam Nakagama, a Wall Street economist, suspects that fundamental changes in the economic-social-political structure since 1979 may have made the economy more stable. The ``old'' economy was dominated by Big Labor and Big Business. Many trade unions were able to push the wages and benefits of their members above the pay of most other workers, resulting in a wage-price spiral.
Fed action to restrain inflation, Mr. Nakagama adds, was too weak and tardy, partially because financial regulations and the tax system limited the impact of monetary policy until many months had passed.
Now ``big unions can no longer extract the excessive pay scales that formerly fueled the wage-price spiral. And international competition keeps prices in line in a broad range of industries.''
Further, says Nakagama, financial deregulation and computerization means monetary policy has a quicker impact on the economy. The lag between Fed action and its effect may be shorter than six to nine months.
If so, recessions may be milder, doing less damage to the federal deficit, junk bonds, and the stock market. That would be just fine.