TIME: Almanac 1993/TIME Almanac 1993.iso/time/101491/1014200.000

Text File | 1992-08-28 | 9.9 KB | 198 lines

                                                                                BUSINESS, Page 42

SPECIAL REPORT: America's Run-Down Economy

A Slump That Won't Go Away


Thanks to the borrow-and-spend binge of the '80s, the U.S.
remains burdened with problems that will frustrate growth for
years to come

By JOHN GREENWALD -- Reported by Bernard Baumohl/Los Angeles,
Gisela Bolte/Washington and William McWhirter/Detroit


    In the afterglow of the allied victory in the gulf war
last spring, the U.S. economy seemed ready to shake off its
malaise. Consumer confidence rose sharply, and sales of cars and
homes began to shift into high gear. But in the clear light of
autumn, that hopeful moment seems long gone. Despite assertions
from Washington and most economists that the recession ended
last May, the recovery may be the weakest in postwar history,
and many sectors could even be sliding backward. "The situation
is far worse than the government would like us to believe, and
things are going to remain this difficult for some time," says
Bernard Brennan, chairman of Montgomery Ward. "I think we're
naive to assume that we're out of the recession. It's even
probable that the next phase could be worse than the first."

    That gloomy assessment reflects one of the great ironies
of current events. At the moment when democracy and free
enterprise have triumphed over communism in the Soviet Union and
Eastern Europe, the U.S. is paying the price of capitalism run
amuck. Maimed by the prodigious explosion of debt that
characterized the 1980s, the overburdened economy is undergoing
a painful consolidation and a shift in values away from the
fast-money, speculative practices that came at the expense of
financial soundness and long-term growth.

    The '80s left behind structural burdens that are likely to
rob the U.S. of robust growth for several years. Among them:
record federal deficits (the past fiscal year: $285 billion) and
an orgy of overbuilding that has sent the commercial real
estate industry into an out-and-out depression. The glut of
empty office towers could take a decade or more to pare down.
Beset by the speculative hangover, the economy has expanded just
2.6% from 1989 through mid-1991. Economists predict that the
economy will bump along at a sluggish pace of less than 3% a
year through 1995.

    The fallout from the '80s has given consumers, who account
for two-thirds of all spending, an abiding fear of being laid
off as companies retrench for lean times. Since the recession
began in July 1990, more than 1.6 million jobs have been lost.
The Labor Department reported last week that the unemployment
rate in September slipped a notch, to 6.7% from 6.8% the
previous month. While President Bush hailed the movement as "one
more sign that the economy is strengthening," many economists
and investors saw little to cheer. Among other grim signs, the
labor statistics showed that the number of discouraged workers,
those who have quit looking for jobs and are no longer counted
among the unemployed, had risen by 100,000 in the third quarter,
to 1.1 million. "The economy is going nowhere fast. There is
some recovery, but still lots of flatness and recession," said
Allen Sinai, chief economist at the Boston Co.

    The unemployment report came two days after American
Express said it would lay off 1,700 workers and take a $265
million write-off because of rising defaults among holders of
its new Optima credit card. Ames Department Stores, meanwhile,
said it would close 77 of its 448 stores and lay off about
4,500 employees early next year.

    Spending is caught in what might be called a lending
gridlock. Bankers, many of them saddled with bad loans and
hampered by overzealous regulation, have been unwilling to lend.
But even when they do make money available, many over leveraged
consumers and companies are reluctant to borrow more. "You are
not going to have a robust recovery until both borrowers and
lenders are through making their balance sheets look healthier,"
says John Makin, director of fiscal-policy studies at the
American Enterprise Institute, a Washington think tank.

    The economy's few bright spots are flickering at best.
Buoyed by exports of capital goods, some manufacturers have been
adding jobs at a time when most other industries have been
cutting back. But the government reported last week that orders
for U.S. factory goods tumbled 1.9% in August following a
strong increase in July. If manufacturing falters, the last best
hope will be housing, which has benefited from a drop in
fixed-rate mortgage costs. The Commerce Department said last
week that sales of new single-family homes rose 6.7% in August,
the sixth gain in seven months.

    Burdened by the runaway federal deficit, Washington cannot
cut taxes or increase spending to stimulate business growth, as
it did in every other major downturn since World War II. Nor has
the Federal Reserve Board's actions to lower interest rates
provided much of a lift outside the housing market, even though
the prime rate has fallen from 10.5% two years ago to 8% today.
With inflation now down to a modest 2.7%, the Fed last week
reportedly gave Chairman Alan Greenspan approval to reduce
interest rates even further if he deems it necessary to bolster
the recovery.

    One reason this recession has so profoundly hampered
spending is that the middle class has been hard hit. Nearly
600,000 of the lost jobs belonged to middle managers and other
white-collar workers as companies slashed their payrolls because
of slow sales, crushing interest charges and tough foreign
competition.

    "There is no historical precedent for this," says Dan
Lacey, an Ohio-based employment consultant. "This does not
represent a recession," he says of the downsizing, "but a
permanent shift in management thinking that is both structural
and profound." Outplacement services are in heavy demand.
William Morin, chairman of the job-search firm Drake Beam Morin,
calls the latest round of corporate restructurings "the most
aggressive I've ever seen."

    Shell-shocked consumers have plenty to worry about besides
losing their jobs. Debt burdens are now so heavy that Americans
are filing for bankruptcy at a record annual rate of 880,000;
the number could swell to 1 million for the entire year. At the
same time, household tax burdens are rising because of
increased levies by deficit-ridden state and local governments
and last year's federal budget agreement, which boosted alcohol,
tobacco and payroll taxes. According to the Tax Foundation,
taxes will absorb a record 35.1% of Americans' income in 1991,
up from 34.1% the previous year.

    Yet the new levies seem unable to ease urban woes. In a
survey last week of 62 members of the U.S. Conference of Mayors,
58% believed the economy's current problems were harming their
communities more than the severe 1981-82 recession had.

    A combination of fear, prudence and even trendiness has
turned American consumers into chronic stay-at-homes. "This
recession has become a state of exhaustion from the delusions
of the 1980s," says Audrey Freedman, a management counselor for
the Manhattan-based Conference Board. "There is a general public
turning away from confidence in government, the private sector
and enterprise itself. We're just tired."

    Not everyone is worn out, of course. Foreign demand for
U.S. products, spurred by the strength of foreign currencies in
relation to the weak dollar, has created a boomlet for some
manufacturing firms. "If we didn't read about it in the
newspapers, we wouldn't know a recession has been going on,"
says George Schueppert, chief financial officer of CBI
Industries, an energy-equipment company that has totted up $1.5
billion worth of new orders this year, largely from Asia and
Latin America. But merchandise exports amount to just 7% of
American GNP and can scarcely drag the economy out of the
doldrums single-handedly. Moreover, the manufacturing boom could
quickly go bust if nervous domestic consumers don't start
opening their wallets soon.

    Few industries have been whipsawed by stop-and-go shopping
as severely as U.S. automakers. Despite a surge in July, their
sales for the model year that ended in September totaled just
12.5 million units, the lowest level since 1983. With domestic
auto plants now running at an average of just 65% of capacity,
Detroit claims that no car-makers -- not even the Japanese --
are operating profitably in the U.S.

    Fickle buying habits have left executives scratching their
heads. "There is this very erratic pattern," notes Harold
Poling, chairman of Ford, whose restyled Ford Taurus and Mercury
Sable models have been slow to roll off new-car lots. "Dealers
will have a positive week, then one when nothing happens. It
looks like a long, drawn-out and weak time ahead."

    That will be the painful consequence of the heedless and
high-flying '80s. "We live in the box we've got ourselves in,"
says Lyle Gramley, chief economist for the Mortgage Bankers
Association of America and a former Fed governor. "We are paying
the price for what we did in the past with this enormous federal
deficit. The price goes beyond the poor functioning of the
economy now. Here we are, this great, wealthy, affluent nation,
and we cannot afford to rebuild our highways or bridges. We
cannot afford to have a really serious war on drugs. We cannot
afford to improve our educational system. This is absurd."

    Reinvigorating the economy will require substantial new
investments in all the areas that Gramley mentions. That has
already triggered a politically volatile debate about shifting
funds from defense to education and other programs to foster
long-term growth. But having triumphantly demonstrated the power
of capitalism to doubters abroad, the U.S., ironically, now
faces the test of showing that the American brand of private
enterprise can still solve problems at home.