THE BLIZZARD OF PINK SLIPS IS KEEPING A SPRING RECOVERY SNOWBOUND
It's spring, a time for hope and renewal. Most forecasters think that holds for the U. S. economy as well. According to the April survey by Blue Chip Economic Indicators, 7 out of 10 economists say the recession will be over in either April, May, or June. If recoveries grew from optimism, that consensus might be right. However, upturns need jobs, incomes, and spending--seeds that haven't even sprouted yet.
That's clear from Washington's latest data. Businesses are still shedding employees at a rapid rate, which means that consumer incomes continue to suffer. The sharp slowdown in installment credit shows that, despite the Federal Reserve Board's efforts to cut interest rates, households are averse to taking on more debt. And the sharp drop-off in demand in the fourth and first quarters may cause many companies to scale back their capital spending plans for 1991.
Judging by the Labor Dept.'s downbeat report on the March job markets, the recession showed no sign of hitting bottom last quarter. If anything, it picked up speed. Hours worked by nonfarm employees fell at an annual rate of 5.6% in the first quarter, faster than the 4.4% drop in the fourth quarter (chart).
Based on past experience, such sharp declines in hours worked suggest that first-quarter real gross national product fell faster than the 1.6% dip posted in the fourth quarter. In fact, the drop could be much larger than the consensus forecast of a 1.8% decline.
As in the fourth quarter, weakness in nearly all categories of domestic demand continue to fuel the recession. The GNP report should show that spending last quarter on consumer items, homebuilding, business construction, and capital equipment all dropped sharply. Operation Desert Storm probably boosted defense spending but not enough to provide an offset. A reversal of such a steep drop in demand will not happen quickly.
In particular, the slide in consumer spending is one of the largest two-quarter declines on record. Turning around that two-thirds of GNP will require more than the recently improved readings on consumer expectations--it will take income. But after looking at the employment report for March, it is no wonder that consumers' assessment of their current situation is far more sobering than their expectations for the future.Nonfarm industries eliminated 206,000 jobs in March, bringing the total employment losses since last June to 1.5 million. The decline continued to be especially broad. For the second consecutive month, less than 40% of the 356 surveyed industries added workers to the payroll. So far, the pace of job losses matches the rate of decline during the early months of the 1981-82 recession, one of the two worst downturns of the postwar era. And the jobless rate continues to rise, hitting 6.8% in March.
A growing hallmark of the 1990-91 downturn is the loss of jobs in the service industries. Excluding the small, but rapidly growing, health care sector, service companies have let go 661,000 workers since last June. This 0.9% drop is already larger than in any previous recession except the severe 1973-75 downturn. But further cutbacks in service jobs seem likely because of the sector's continuing profit squeeze.
Still, manufacturing and construction continued to take the biggest hits in March. Factories laid off 92,000 workers, while construction lost 72,000 jobs. The manufacturing declines, combined with a 0.2-hour drop in the factory workweek, to 40.1 hours, assures that industrial production posted another sizable decline in March. In fact, industrial output appears to have fallen faster in the first quarter than the 7.2% annual rate of decline posted in the fourth quarter.
The March drop in construction jobs was particularly revealing. Coming after an increase in February, it shows that February's atypically mild weather, following an unusually harsh January, may have had more to do with the February job gain than any real strength. This pattern suggests that much of the February rebound in other construction data, such as housing starts and sales, likely reversed course in March as well.
The layoffs at building sites and factories--especially those making machinery and other equipment--suggest that capital spending is struggling, even as companies report plans to increase their capital budgets.
According to the Commerce Dept.'s survey of plant and equipment spending taken during January through March, businesses plan a 2.5% increase in their capital budgets for 1991 (chart). Although the rise is less than the 5% gain in 1990, the expected plans mean that this recession's slowdown in business investment would be very mild compared to past downturns.
The Commerce Dept. survey also shows that spending is slated to rise sharply in the first and second quarters and then hold steady in the last half of the year. But recent monthly data suggest that capital spending fell in the first quarter. In addition to job losses at many goods producers, shipments of nondefense capital goods dropped sharply last quarter. Plus, the downward estimates of first-quarter earnings for many of the major computer companies suggest that demand for processing equipment just hasn't materialized.
All this suggests that the latest capital-budget plans may be a bit optimistic. Moreover, the longer the recession drags on, the more likely it is that businesses will scale down their plant and equipment needs.
WAGE GAINS? THERE AREN'T ANY
The recession has already lasted long enough to cut into wage growth. Nonfarm wages jumped a bit in March, by 0.5% to $10.25 per hour, but pay had hardly changed in January and February. So for the first quarter, hourly wages rose at an annual rate of just 2.5%, compared with a mere 2.1% in the fourth quarter. That's the slowest two-quarter increase in three years.
Wage growth may pick up a bit in April, because the rise in the minimum wage, to $4.25 an hour from $3.80, may exert some upward pressure on this month's wage data. But that could be offset by smaller raises given to workers who earn more than the minimum. Holding down pay increases is crucial for companies trying to rein in costs while demand is slumping. So after April, salary increases should fall back to a much weaker pace.
Moderate wage growth sets the stage for lower inflation and better profit margins. But personal income growth will, of course, suffer. And that means that consumer spending--the key to turning around this economy--will be hard-pressed to recover anytime soon.Not surprisingly, the combination of war and recession has caused many households to put buying plans on hold. The Conference Board reports that almost 35% of the 5,000 households it surveyed in March postponed purchasing a big-ticket item in recent months.
NO ONE WANTS TO BORROW MUCH
The Conference Board's survey simply confirmed what retailers already knew: Households aren't buying. And they aren't using their credit cards as much either. Consumer installment debt fell by $2.3 billion in February. That was the third consecutive drop, something that hasn't occurred in four years. In the past 12 months, credit outstanding has risen by just 2.3%, less than half the 5.2% rate a year earlier (chart).
People are cutting back on most types of borrowing. Auto loans, which have been declining for a year, fell by $3.1 billion in February. And since October, revolving debt--which includes credit cards--has increased by an average of just $807 million each month. That's a sharply slower pace than the $2.6 billion a month added in the five months before that.
Even with the recent declines in installment credit, however, debt levels remain precariously high. Credit outstanding equals 18% of disposable income. That's well above the 14% level posted during the last recession.
Clearly, debt levels will have to shrink, and job and income growth will have to stabilize, before consumers start spending again. The March employment report suggests that will take time. Spring may be a time for rejuvenation, but the numbers imply that an economic recovery is still some months down the road.James C. Cooper and Kathleen Madigan