TIME: Almanac 1993/TIME Almanac 1993.iso/time/052289/05228900.024

Text File | 1992-09-23 | 8.1 KB | 157 lines

                                                                                BUSINESS, Page 81

Look Out Below!


The slipping U.S. economy could land safely -- or be blown into a
slump

By John Greenwald


    In biblical times, a famed Pharaoh once dreamed of seven
fat years of plenty followed by seven lean years of want. With
the U.S. economy in the seventh year of a record peacetime
expansion, signs are multiplying that for many Americans the fat
times are coming to an end. In their place, economists prophesy
everything from a soft landing, which could mean weak growth but
little pain, to the ominous prospect of a deep recession. Few
seers doubt, however, that a slowdown is at hand. "This has been
a long expansion," says Allen Sinai, chief economist of the
Boston Company Economic Advisors, a leading consulting firm.
"But the spring has run out."

    The Government gave new credence to that view last week,
when it reported that U.S. retail sales climbed a meager 0.4%
in April, far below the 1%-to-2% gain many economists had
expected. The feeble growth would have been weaker but for a
jump in car sales that reflected the most generous incentives
ever offered by Detroit, including interest-free loans.

    Later in the week, Washington had good news: the Producer
Price Index rose by a moderate 0.4% in April, a smaller leap
than most experts had feared. Wall Street responded Friday by
pushing the Dow Jones industrial average up 56.82 points to
2439.70, its highest level since the October 1987 crash. But
when the sharp increases that took place during the first four
months of the year are taken into account, wholesale prices are
still zipping upward at a rapid 9% annual rate. The conflicting
trend lines -- down in retail sales, up in producer prices --
heightened concerns about a return of 1970s-style "stagflation"
-- spiraling inflation combined with sluggish economic growth.

    Those concerns leave the Federal Reserve Board in a
quandary. Under Chairman Alan Greenspan, the Fed has engineered
the slowdown by nudging up interest rates for more than a year
in hopes of keeping inflation in check. Since May 1988, the
prime rate that banks charge major corporate customers has
climbed from 8.5% to 11.5% and fixed rates on home mortgages
have risen from about 10% to 11.5%. Yet while the tight money
has clobbered housing and other big-ticket items, inflation
poses a serious threat. If Greenspan vigorously pushes interest
rates higher to combat that threat, he risks a recession; if he
tries to ease up just enough to permit the economy to make a
soft landing, he risks letting inflation get out of control.

    The ticklish task is made even tougher by the failure of
the Bush Administration and Congress to rein in a runaway
budget deficit that helps keep interest rates high. White House
and congressional leaders merely ducked the issue last month in
a sleight-of-hand agreement that cut the 1990 deficit to about
$100 billion to comply with the Gramm-Rudman law. But a
recession could make a mockery of that rosy projection by
swelling the red ink to as much as $175 billion. "Using monetary
policy to slow the economy is a poor second-best solution," says
David Rolley, a senior economist at the Wall Street firm of
Drexel Burnham Lambert. "Cutting the budget deficit is the
proper tool. But it is late in the day."

    So far, the Administration has adopted a cautious,
steady-as-you-go approach to the slowing economy. Michael
Boskin, the chairman of the Council of Economic Advisers, argues
that the U.S. is on a soft-landing course that needs no
correction. "Some people say that because the expansion is long
it must run out of gas soon," Boskin said in a recent speech.
But he saw "no statistical relationship between the length of
an expansion and the probable downturn in the economy." He added
that the Administration would "make sure this slowdown is indeed
that, and not anything more."

    Yet signs of economic trouble have been flashing for
months. While the gross national product grew at a robust annual
rate of 5.5% in the first quarter of 1989, in contrast to 3.9%
for all of 1988, the gain was propelled by the farm belt's
recovery from last year's drought. In April unemployment leaped
from 5% to 5.3%. Consumer spending, which accounts for
two-thirds of GNP, rose just 0.2% in March while other key
indicators slumped. Sales of new homes fell 5.5% in March after
a 10.5% plunge in February, leaving the stock of unsold houses
at a nine-year high. Automobile sales declined 2% in late April
as the impact of Detroit's rebates began to wear off.

    The auto industry, in fact, virtually symbolizes the
uncertain outlook for the U.S. economy. Despite a record total
of $3.5 billion in first-quarter profits, Ford, Chrysler and
General Motors are expected to sell just 9.8 million cars in
1989, vs. a hefty 10.6 million last year. The decline would
represent Detroit's first slide below 10 million autos since
1983. In another sign of the slowdown, GM announced last week
that it will idle three plants in Michigan and Missouri this
summer for at least a month to help reduce inventories.

    As sales have slowed at home, U.S. exports of everything
from computers to cockpits have weakened as well. The rising
value of the dollar, which has climbed more than 11% against
major currencies since May 1988 after a three-year fall, is
depressing foreign orders for American goods. U.S. exports grew
only 10% in the first quarter of 1989, down from 30% a year ago.
"That's why we are having a slowdown," asserts Lyle Gramley, a
former governor of the Federal Reserve. Whatever the reason,
foreign economists are watching the U.S. with mounting concern.
Since Americans buy a third of all products exported by other
countries, a U.S. recession could damage economies around the
world.

    The slowdown is already spreading hardship from coast to
coast. In Phoenix, Wendy and Brian Minner, both 23, lost their
jobs with a firm that installs fiber-optic equipment when a drop
in business caused the company to retrench. "The main thing is
paying the bills right now," says Brian, a truck driver who
notes that it would cost $2,000 to learn the new skills he needs
to find work. Adds Wendy, a bookkeeper and payroll clerk: "I
finally found a job I liked, and now this." In Chicago the
softening economy has made it harder for Mark Everett, 40, to
get a satisfying job since the 100 Fotomat stores he managed
closed their doors last November. Says he: "There are jobs out
there, but they're all entry level."

    Many economists foresee bleak prospects for millions of
Americans no matter what the Federal Reserve does next. Noting
that wages jumped a strong 0.7% in April despite a rise in
unemployment, some experts argue that the Federal Reserve must
push interest rates higher to keep inflation from heating up.
But opponents of that prescription say it would do more harm
than good. "The greatest threat to the economy now is not
inflation, but recession," says Irwin Kellner, chief economist
for Manufacturers Hanover Trust in New York City. "If the Fed
doesn't relax its grip within two to four months, we'll find
ourselves in a recession by the end of the year at the latest."

    For all the conflicting advice it is getting, the Fed may
be steering an astute political course. "Politicians know that
it's better to have a slowdown now than during the 1990
election," says John Makin, director of fiscal-policy studies
at the American Enterprise Institute in Washington. And while
the experts may agree on little else, most say the economy will
remain in precarious health until Congress and the White House
devise a realistic plan to cut the budget deficit. That will
take some doing. When a perplexed Pharaoh awoke from his
dream-filled sleep, Joseph advised the ruler to store food from
coming harvests against the time of want. At the moment, no
Joseph is available to persuade Washington to adopt frugal
habits, even when the fat years are in danger of turning to lean
ones.


-- Bernard Baumohl/New York and Jerome Cramer/Washington, with
other bureaus