TIME: Almanac 1995

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<text id=89TT1337> <title> May 22, 1989: Look Out Below! </title> <history> TIME--The Weekly Newsmagazine--1989 May 22, 1989 Politics, Panama-Style </history> <article> <source>Time Magazine</source> <hdr> BUSINESS, Page 81 Look Out Below! </hdr><body> 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 </body></article> </text>