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Businessweek Archives

New Numbers, Same Sad Story



On Dec. 3, White House chief economist Michael J. Boskin admitted that in recent months "the economy has turned quite a bit more sluggish." Translation: The recovery hit a brick wall last summer, and the new risks for the next couple of quarters are either stagnation or renewed recession.

Clearly, if the economy was in a recovery, it isn't any more. The reason: The post-Desert-Storm rebound failed to generate growth in jobs and incomes sufficient to sustain consumer demand. Now, the recovery process that started to come together last spring is coming unglued. Inventories aren't so lean any more, and the upturn in factory orders and production has gone flat.

The Commerce Dept.'s revised numbers on third-quarter economic growth highlight the current quarter's problems. Real gross domestic product rose at an annual rate of only 1.7% last quarter, instead of 2.5% as first reported. Growth was lower despite a much larger contribution from inventory growth than originally thought. However, final sales fell 0.9% instead of rising 0.7%. Consumer spending and business investment were revised sharply lower.

Commerce's latest report included another of its rewrites of history. From now on, the government will measure economic growth using gross domestic product instead of gross national product. GDP captures growth within U. S. borders, while GNP includes U. S. operations abroad. The two measures are virtually the same.

Also, the government included its annual benchmark revisions and switched to a base year of 1987, from 1982, for indexing prices. After this makeover, the recession looks a little deeper. The recovery, while more clearly visible, still looks unimpressive (chart).





The third-quarter GDP data imply that production ran ahead of demand, and with spending off to a weak start this quarter, pressure to cut back output is building. Already, sagging car sales have forced U. S. auto makers to slash their first-quarter production schedules to a pace comparable to the recessionary level in the first quarter of 1991. That's sure to be a big drag on economic growth next quarter.

But it's not just carmakers that are under pressure. Factory orders for durable goods rose 3% in October, but they had fallen 4.2% in September and 4.1% in August. And orders began the fourth quarter well below the third-quarter average.

Things didn't look much brighter in November, according to the National Association of Purchasing Management. The NAPM's index of industrial activity fell to 50.1% last month, the second consecutive drop (chart). Since a reading of 50% is the dividing line between expansion and contraction in manufacturing, the index says that the factory sector has stopped growing.

The NAPM said that weaker production and a third consecutive easing in new orders suggests anemic growth for the immediate future. Some members indicated that inventories were higher because output and orders were lower than expected. And some said that recently announced price hikes were either rescinded or delayed, indicating weakening demand.

The recovery's struggle is best captured by the government's index of coincident indicators. This composite of industrial production, employment, incomes, and business sales fell 0.2% in October, and it has been sliding lower since hitting a peak in July (chart, page 24 16 ). The index has now lost a third of the gain it had made from March to July, and it shows that economic activity began the fourth quarter below the third-quarter level.

Moreover, the index of leading indicators suggests no improvement for a while. This forward-looking gauge edged up only 0.1% in October, after dipping 0.1% in September, and it is no higher than it was in July.

The recovery's problems may force the Federal Reserve into action again. The Fed's latest regional survey of business conditions reported "flagging momentum in the economic recovery in October and early November." The report fuels speculation that the Fed will vote at its policy meeting on Dec. 17 to cut interest rates further.





The economy's future hinges on consumers, since their spending supports two-thirds of output. The trouble is, it looks as if consumers plan to hibernate this winter. They have plenty of reasons: few new jobs, weak income growth, debts that are becoming harder to repay, and the lowest confidence level in more than a decade.

The chief problem is weak income growth. Personal income rose by 0.2% in October, but special payouts including farm subsidies and bonus payments to auto workers pushed up earnings. Excluding all unusual factors, personal income fell by 0.1%.

Wages and salaries were down in October, as was interest income. Not surprising in this stalled economy, the fastest-growing segment of income is government transfer payments. They're up almost 10% from last year. And such income will get a further boost, probably in December, as those qualifying for extended jobless benefits start to receive unemployment checks again.

Still, today's growth in earnings is too tepid to support much new spending in coming months. After accounting for taxes and inflation, real disposable income rose just 0.1% in October. And that came after no growth in the third quarter. Before the government's revisions, real income had shown a 2% gain, at an annual rate.

It's little wonder, then, that real consumer spending fell by 0.4% in October. Also, September's data were revised down to show only a 0.4% gain, instead of the previously reported 0.6% rise. This means that spending began the fourth quarter about 1% below its third-quarter pace, at an annual rate.

Judging by November car sales, consumer spending hasn't snapped out of its October doldrums. Sales of U. S.-made cars picked up a bit in late November, but the monthly total languished at the October pace of about 6 million.

A reversal of what looks like a new round of retrenchment by consumers will not be easy in the face of slack hiring, meager pay raises, and low confidence. Also, households have a huge pileup of past borrowings that must be repaid and little savings. Consumers socked away just 4.4% of their disposable income in October.

Also, a growing number of households are unable to repay their existing debts. According to the Mortgage Bankers Assn., the percentage of mortgages that haven't been paid in 90 days or more jumped to 0.85% in the third quarter, from 0.78% in the second. These delinquencies are usually precursors of foreclosures.





Mortgage problems are rising despite falling interest rates. And lower borrowing costs aren't attracting as many buyers as in past upturns. In October, new single-family homes sold at a 513,000 annual rate, up 2.2% from September (chart). And the September sales pace was revised upward to 502,000, from the disastrous 446,000 first reported. That change suggests that housing isn't in as much trouble as thought a month ago.

But sales are not showing the same momentum as in the past. For example, the last time 30-year fixed mortgages rates fell below 9%, back in 1977, new homes were selling at a vibrant 800,000 annual rate.

Builders have kept the supply of unsold homes lean, and so housing starts are still climbing. But until home buying shows more strength, the building industry won't add much support to this economy. Construction is recovering, but it has a long way to go. Construction spending rose 1% in October, to an annual rate of $411.5 billion. But outlays are 5.3% below year-ago levels, which were 2% below the previous year.

Unlike the rest of the economy, the building industry has improved since the summer. Real outlays are up at an annual rate of 10.6% since July. However, it was consumers who threw up the brick wall that stymied the recovery. And the economy cannot move forward until consumers are ready -- and able -- to tear the wall down.JAMES C. COOPER AND KATHLEEN MADIGAN

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