Time - Man of the Year/Time_Man_of_the_Year_Compact_Publishing_3YX-Disc-1_Compact_Publishing_1993.iso/moy/040692/0406200.000

Text File | 1992-10-19 | 11KB | 213 lines

                                                                                BUSINESS, Page 47

THE ECONOMY

Which Way Is Up?


Housing and retail sales prod a sluggish recovery, but it will
take more robust growth to bring back the jobs -- and help Bush
in November

By JOHN GREENWALD -- Reported by Bernard Baumohl/New York,
Sylvester Monroe/Los Angeles and Richard Woodbury/Houston


    After the longest U.S. slump since the Great Depression,
the first signs of recovery have begun to sprout like early
spring blossoms. Spurred by a decline in interest rates,
Americans have been snapping up houses and heading off to
shopping malls in growing numbers. Tightfisted bankers have
begun writing new loans, and some companies are seeing an
encouraging increase in orders.

    But hold the applause, please. A combination of high
unemployment and low consumer confidence seems certain to make
this America's weakest rebound since World War II. With the
economy stuck in slow motion, a new round of layoffs could
plunge the U.S. right back into recession. And this year there
is even more at stake than jobs and profits: the rate of
recovery could very well decide the presidential election in
November.

    No one is more mindful of that fact than George Bush, who
has presided over the puniest four-year growth rate since
Herbert Hoover. The Administration is naturally hoping for a
solid rebound. But after virtually ignoring the recession last
year, Bush now shies away from making any rosy remarks that
could haunt him in November. "When you say the recession is
over, the public expects the economy to be back in good shape,"
observes a White House official. "Clearly, that is not the case,
and it will not be the case for quite some time."

    The Democrats are in a no less awkward position. They
cannot openly root against a recovery, although a sharp upturn
could dash the party's election hopes. Both Bill Clinton and
Jerry Brown, therefore, must concentrate on attacking Bush's
economic stewardship no matter how the recovery develops.
"Clinton entered this race because the country has suffered for
11 years without an economic strategy that would make us richer
over the long term," says Bruce Reed, a deputy campaign manager
for the Arkansas Governor.

    A spate of reports last week traced the powerful riptides
that continue to buffet the economy. The Commerce Department
said the gross domestic product grew at a microscopic annual
rate of 0.4% in the fourth quarter last year, only half as much
as the previous estimate. The job picture darkened as new
unemployment filings rose by an unexpectedly high 15,000 claims,
to 447,000 in mid-March. And orders for big-ticket durable goods
ranging from turbines to battleships fell 0.1% in February,
after rising a sprightly 2.5% in January. There has been good
news as well: purchases of existing homes jumped 9.3% in
February, while retail sales rose 1.3% the same month.

    The lingering gloom reflects woes that have been building
for years and will take years to dispel. "The restructuring of
corporations, heavy debt loads and the perceived lack of
leadership have been bothering the consumer, and a lot of this
hasn't changed much yet," says Donald Ratajczak, an economist
at Georgia State. Forecasters thus predict an anemic 1.5% growth
rate for 1992, far below the robust 5.5% average for the first
year of past turnarounds. Such sluggishness would scarcely
reduce unemployment, which stands at 7.3% and could climb even
higher as the Pentagon demobilizes the armed forces and slashes
military contracts.

    Nowhere has the economic engine been sputtering more
loudly than in Detroit, where car sales had climbed 3% during
the first two months of this year only to slide 6.9% in the
period from March 11 to March 20. "Obviously, this is not a
boom," says Thomas Webb, chief economist for the National
Automobile Dealers Association. Yet the modest overall pickup
has left the Big Three with dwindling backlogs of unsold cars
and busier production schedules. Ford plans just 12 weeks of
plant shutdowns to trim inventories in the second quarter,
compared with 36 weeks for the same period a year ago. The
downtime could be extended, though, if buyers stay fickle. Says
a Ford analyst: "If we had three or four bad weekends in a row,
we'd have to adjust our schedules again."

    That remains a strong possibility, since many economists
doubt that the recovery will have much staying power. They
contend that unseasonably warm winter weather artificially
boosted housing and stimulated consumer spending. At the same
time, they note, Administration gimmicks like the acceleration
of federal payments to veterans and health-care facilities will
taper off sharply this fall. "Most likely the economy will
worsen again later this year or in early 1993," write David Levy
and S. Jay Levy of the Jerome Levy Economic Institute at Bard
College. "Unfortunately, the positive effect of these
stimulative actions will be short-lived and give way to negative
effects in 1993."

    Yet the economy has some real strengths that could bolster
the recovery. Inflation is running at a modest 3% pace and
shows no signs of heating up anytime soon. Consumers and
companies have seized the chance to lighten their debt loads by
refinancing them at lower interest rates. Companies have also
charged into the bull market for stocks to raise cash and pay
off IOUs. Corporate America sold a record $55 billion worth of
new shares last year to help clean up its balance sheet.

    Some economists fear, though, that the boost from falling
interest rates may already have peaked. Homeowners who
refinanced their mortgages at rates that dipped below 8.25% in
January collectively stand to save up to $15 billion in interest
charges this year. But as mortgage rates have climbed back over
9%, the volume of refinancing has fallen off sharply. At the
same time, applications for first-time mortgages have tumbled
nearly 15% since February. "The biggest threat to the recovery
would be a surge in interest rates," says Lynn Michaelis,
president of the National Association of Business Economists.
"That would nip the recovery right in the bud."

    With the outlook so tenuous, consumers have mixed emotions
about spending their money. "Everything seems very unsettled
right now," says Carol Jeanes, 38, who is publications director
for the Houston Association of Realtors. "Everyone I know is
jittery. It's hard to feel that things are better when your
friends are getting laid off and having to readjust their whole
careers." Despite her concerns, though, Jeanes is shopping for
a new house because of low interest rates.

    Many businesses are likewise waiting impatiently for the
upturn to reach them. "The recovery -- yeah, they announced it
the other day," scoffs Tom Barrows, 57, who runs an
office-supply shop in Atlanta. "It was good they told me,
because I didn't know. I'm not seeing any turnaround or new
confidence." Concurs Robert Deck, 48, a Michigan steel salesman:
"Nobody's carrying any inventory. If you get an order, it's just
enough to get them through that job."

    In once golden California, where unemployment reached 8.7%
in February, workers are reeling at the prospect of defense
cuts that could eliminate as many as 140,000 jobs by 1995, or
nearly two-thirds of the remaining aerospace labor force. That
would be in addition to 71,000 mechanics, engineers and managers
who were already laid off over the past three years. General
Colin Powell, Chairman of the Joint Chiefs of Staff, described
the grim outlook last week during a visit to Los Angeles. Said
he: "Everyone needs to wake up and smell the coffee. I'm
telling my folks at the Pentagon, `Guys, we are having a hell
of a fight this fiscal year, but it is nothing compared to what
is coming next year.'"

    While defense contractors suffer, small and medium-size
firms that have vigorously cut costs could be in for
recovery-generated profits. "I am more optimistic for
middle-market companies than for Big Business," says Art
Nemiroff, managing partner of the Los Angeles branch of the
consulting firm BDO Seidman, whose 2,200 U.S. clients include
retailers and manufacturers with sales of up to $100 million.
"Most of our clients were able to downsize quickly," Nemiroff
adds. "They are operating from a leaner and meaner position
today."

    Yet relentless cost cutting by everyone from mom-and-pop
businesses to such corporate giants as IBM and General Motors
could undermine the recovery. While workers who lost jobs in
previous slumps often came right back when things looked up,
much of the current downsizing has been permanent. "All kinds
of companies have got new religion about cost control," says
William Melton, chief economist for Minneapolis-based IDS
Financial Services. "And this will really have an impact on job
creation." Thus many middle managers and blue-collar workers
alike could have little chance of returning to work unless they
change careers.

    Declining exports could further hamper Americans' job
prospects. While U.S. sales abroad last year provided most of
what little strength the economy showed, slumps in Japan and
Germany threaten to cut into that foreign business. Moreover,
newly cautious Japanese companies seem reluctant to continue
making job-creating investments in U.S. factories and real
estate, and have already begun to withdraw from the Treasury
markets that finance the U.S. deficit. "No more Japanese
investors are coming in," observes Georgia State's Ratajczak,
"and that's a problem."

    Neither the White House nor Congress has begun to offer
serious solutions to the economy's long-term troubles. On the
contrary, both branches have permitted the budget deficit, which
soaks up savings and hinders investment, to balloon to a
projected $400 billion this year. And while the Administration
once predicted that the deficit would disappear by 1996, it now
foresees at least $200 billion worth of red ink for the next
five years.

    But it is not the long-term factors that will affect this
year's political equation. When voters go to the polls in
November, they are likely to remember Ronald Reagan's famous
1980 question: "Are you better off than you were four years
ago?" The answer to that, more than anything else, may determine
which lever they will pull.