THINK THE DOWNTURN IS OVER? JUST LOOK AT THE INDICATORS
By historical standards, the 1990-91 recession is easily middle-aged. That makes forecasters feel pretty comfortable when they assert that a recovery beginning around midyear is a good bet (page 18). Well, midyear is only a couple of months away, and the data continue to show that the fundamentals for an upturn are not in place. To be sure, all recessions eventually end, but this one still looks like it might be around a little longer than many economists had expected.
The economy's problems are deeply rooted. The numbers show that the recession's vicious cycle remains firmly in place, as weak demand causes losses in output, jobs, and incomes--which fuel new weakness in spending. But in addition to its cyclical woes, the economy has structural problems--in real estate, banking, government finances, and household debt--that are also exerting downdrafts on top of the traditional business cycle.
Such a hostile climate for growth has all but eliminated any chance for a spring rebound. Going into April, the economy's same old troubles aren't going away. Consumers aren't spending. Industry is slashing production and payrolls. And housing starts, which looked as if they had bounced off the bottom in February, are sinking back down.
Now, there are new concerns. Amid a severe slump in domestic demand, inventories don't look as lean as they did last year (chart). Weak demand, sagging profits, and falling operating rates dim the outlook for capital spending. The growing threat of a global recession raises concerns about U. S. exports. And the rail strike could make matters temporarily worse.
Of course, the economy's weakness is the inflation outlook's strength. The March price indexes were especially encouraging. Lower inflation will play a key role in the recovery process by allowing long-term interest rates to decline, helping to shore up demand for houses, cars, and other big-ticket items. But it will take a while for all the elements of recovery to fall into place.
APRIL SHOWERS BRING NO SHOPPERS
Consumers are still out of the picture. After all the anticipation of a buying spree after the end of the gulf war, it turns out that retailers sold more goods during the war than they did after it was over. Retail sales dropped 0.8% in March, following a 2% surge in February. In March, most stores--including building suppliers, car dealers, department stores, and clothing shops--gave back the big gains they had racked up the month before. The flip-flop probably reflected seasonal anomalies, particularly an unusually warm February.
Despite the monthly gyrations, retail sales in March remained below their year-ago level. And after adjusting for inflation, real sales in the first quarter fell at an estimated annual rate of 6.6%. That's about the same drop posted in the fourth quarter, resulting in one of the most severe back-to-back declines in the postwar era.
Signs of consumer activity in early April are not favorable. Sales at big retailers remained sluggish, and car sales were ghastly. Sales of domestically made autos dropped to an annual rate of just 5.6 million in early April, down from a sluggish 6.2 million pace in March.
It would be unusual and unlikely for retail sales to continue sliding in the second quarter as fast as they did in the previous two quarters, but there is also little reason to expect a sales rebound. And that will continue to squeeze ordering and payrolls.
IN DETROIT, THE WORST TIME SINCE THE EDSEL
Industrial companies know the drill all too well. Output in manufacturing, mining, and utilities fell further in March, dropping 0.3% after plunging 0.9% in February. Industrial production declined even faster in the first quarter than it did in the fourth quarter. It fell at an annual rate of 9.3%, compared with the fourth quarter's 7% rate of decline (chart). More cutbacks seem likely, particularly in light of Detroit's troubles.
This quarter, the Big Three auto makers plan to produce the smallest number of cars in any second quarter since 1958. At a seasonally adjusted annual rate, second-quarter auto production is unlikely to be any higher than last quarter's 5.2 million pace--the lowest since the 1981-82 recession. So the output and employment numbers in coming months will get no help from Detroit and its large network of supplier industries.
In addition, there are hints of a budding inventory problem. Stock levels at manufacturers, wholesalers, and retailers dipped 0.2% in February, but during the past six months, inventories have risen 0.8%, while business sales have dropped 4.6%. As a result, the ratio of inventories to sales has risen sharply since the recession be gan, even after adjusting for inflation. Without a pickup in sales, businesses may want to trim their inventories, further curtailing output and delaying the recovery.
The March drop in industrial production mainly reflected output declines in construction supplies, business equipment, and the large materials sector--about 40% of industrial output. The weakness in construction supplies, along with a continued slump in production of home-related goods, highlights housing's ongoing problems.
Housing starts fell 9.3% in March, to an annual rate of 901,000, giving back almost two-thirds of the big gain scored in February. Clearly, February's unusually mild weather was the biggest factor in the month's strength.
Ignoring the monthly ups and downs, first-quarter housing starts were off 12.3% from the fourth quarter and 36.3% from a year ago. One good sign in March was a second consecutive rise in new building permits. Homebuilding seems to be searching for bottom, but even so, it's not clear if it is ready to mount a recovery.
DOWNTIME DOMINATES THE SHOP FLOOR
Recent declines in the production of business equipment are especially discouraging for the outlook. Despite the Commerce Dept.'s latest survey that showed little change in capital-spending plans for 1991, the output losses could be signaling that companies are cutting back on their purchases of new equipment.
Output of business equipment, such as machinery, trucks, and computers, fell 0.5% in March. For the quarter, it dropped at an annual rate of 6.3%, after falling at a 7.6% pace in the fourth quarter. Declines in industrial equipment have been especially steep.
The fundamentals for capital spending are already weak. First-quarter corporate earnings look soft, which saps internally generated funds. Domestic demand is not picking up the way many companies had hoped. And the use of existing production capacity is still falling.
Industrial operating rates dropped four-tenths of a percentage point in March, to 78.7%, the lowest since the strong dollar weakened industry 4 1/2 years ago. Capacity utilization in manufacturing fell to 77.4%, the most production slack there in 7 1/2 years.
PRICES AREN'T SPIRALING UPWARD
Overcapacity may not bode well for capital spending, but combined with the ongoing slowdown in wage growth, it is a definite plus in the outlook for inflation. The price reports in both January and February had cast some doubts on the notion that inflation was ready to slow, but the March numbers set the record straight.
The consumer price index fell 0.1% in March, but more important, the core rate, which excludes volatile food and energy prices, rose only 0.1% (chart). In fact, the rise in the core rate was the smallest in more than eight years. Consumer prices for clothing and housing, which had taken worrisome leaps in January and February, either posted slim gains or outright declines in March. At the wholesale level, producer prices in March gave optimistic readings as well.
Future price indexes aren't likely to look as tame as they did in March. However, moderation in inflation is an inevitable process that accompanies a recession, usually showing up in the downturn's later stages. Although the core rate of consumer inflation is still 5.2%, a decline to about 4% by yearend seems reasonable.
However, the prospect of lower inflation is cold comfort to anyone looking for an end to the recession. If this is an average 11-month downturn, it will be over around July. If the recession lasts as long as the postwar record of 16 months, it will be over by yearend. Right now, somewhere within that range looks like the best bet.JAMES C. COOPER AND KATHLEEN MADIGAN