ELECTION FEVER IS ONLY MAKING THE ECONOMY JUMPIER
There seems to be a bad case of preelection jitters going around. The financial markets are jumpy. Consumer confidence is shaky. And the dollar's plunge suggests that foreigners are uneasy as well.
Such skittishness isn't hard to figure. Economic issues haven't loomed so large in a Presidential race since 1980, when Ronald Reagan's landslide victory was strongly influenced by a simple question he put to voters: Are you better off now than you were four years ago? With pocketbook issues aplenty in 1992, Election Day uncertainty carries a particularly sharp edge.
The financial markets seem especially nervous, most prominently the bond market, with its fixed-income investors. They are already worried that the election will bring some deficit-widening initiative--amid a river of existing red ink--that would fuel inflation worries. Now, they have to sweat out the slumping dollar (page 26).
The foreign-exchange value of the dollar has been losing ground against the German mark for more than four months. The slide is primarily the result of polar differences between U.S. and German monetary policies--easy here, tight there. The result: an historically wide spread between U.S. and German interest rates. Short-term rates, for example, are just over 3% here and slightly under 10% there.
More generally, though, the sick currency reflects concerns of foreign investors about economic conditions and policy uncertainties here in the U.S. The Presidential campaign only draws more attention to those concerns.
But on both Aug. 21 and 24, the dollar swooned to post-World War II lows amid futile efforts on both days by the world's central banks to make the greenback swim against the tide of existing economic forces. The slump stopped cold the two-month rally in the bond market and sent long-term interest rates skyward.
Why? A weaker dollar lifts import prices and raises inflation fears. It complicates Federal Reserve policy, because cutting interest rates might push the U.S. currency even lower. And it encourages capital to flow abroad, away from U.S. bonds, stocks, and other assets.
The timing is unfortunate. Lower long-term interest rates are critical to the recovery. For one thing, they are important to housing and durable goods. In July, sales of existing homes perked up, after three straight declines, but orders for durable goods remained weak. They fell 3.4%, more than wiping out June's 2.8% gain. The sagging three-month trend shows why factories are reluctant to lift output and payrolls (chart).
A big downswing in orders for commercial aircraft and defense equipment accounted for nearly all of the July drop, but bookings in other industries also fell. Unfilled orders shrank by 1.4%, the 11th consecutive decline. The backlog is the lowest in 312 years. With little new demand and thinner backlogs, manufacturing can use any help it can get from lower interest rates. Companies may also be holding back on investments in new capital projects until the political dust settles.
Lower long rates are also necessary for consumers and businesses to repair their debt-laden balance sheets. Indeed, corporations are taking advantage of lower rates in order to retire older, more expensive debt. Through Aug. 21, the average yield on AAA-rated corporate bonds had fallen to 7.9%--the lowest since 1977 (chart). As a result, corporate bond sales are at record levels, and companies are making rapid strides toward shoring up their finances.
Progress toward better balance sheets in the household sector, where debt burdens remain huge, is much slower. In mid-August, the pace of mortgage refinancing--a key source of better household finances--was still 312 times greater than it was three months earlier. However, refinancings have dipped in recent weeks, and higher long rates could dampen the pace further.
The Presidential campaign's emphasis on economic issues is taking its cue from recession-weary voters. Corporate cost-cutting is keeping job prospects dim, and incomes are not growing fast enough to help households whittle down their tall stack of IOUs. And those worries, particularly amid swirling election-year uncertainties, are causing optimism to unravel once again.
The Conference Board's index of consumer confidence dropped to 58 in August, after it had plunged 14.9% in July, to 61.2. Households are increasingly pessimistic about how the economy is doing today and how it will perform over the next six months. Job worries have now pushed confidence back to the low reading recorded earlier this year (chart).
The Conference Board says that 47.1% of those surveyed felt that jobs were hard to get. That's up from 43% in July, 38.6% a year ago. In addition, consumers aren't sure that more jobs will appear anytime soon. The survey found that 24.5% of consumers think there will be fewer jobs in the months immediately ahead, compared with only 13.7% who bet employment will improve.
Certainly, slow job growth has been the defining mark of this weak recovery. And the payroll trimming continues. International Strategy & Investment Group Inc. says that the number of large corporations announcing layoffs during the first three weeks in August is up slightly from a year ago.
For many, the pink slip is permanent. Workplace Trends reports that the number of staff cuts announced by U.S. corporations in the first seven months of this year is up 2.3% from last year's record pace. The newsletter projects that for all of 1992, corporations will permanently reduce their payrolls at a rate of 1,500 per business day.
The sluggishness in hiring--and the economy as a whole--isn't hurting just consumers. It also is hammering public finances. Stagnation in tax receipts from consumers and businesses, plus greater demand for jobless benefits and other social services, is inflating an already massive federal budget deficit and creating problems for state and local governments as well. The ballooning of federal debt--at the same time that households and corporations are paring down their own ious--is thrusting Washington's spending habits into the campaign limelight.
Clearly, the deficit is out of control, and neither political party is willing to address the issue. The Treasury Dept. reported a June deficit of $44.6 billion. That's greater than the $40.2 billion gap for all of fiscal 1979.
So far in fiscal 1992, federal outlays are up by some 7.3% from a year ago, but revenues have risen by just 3%. With those divergent trends, the 1992 deficit appears on track to weigh in at about $305 billion--eclipsing the record $269.5 billion of last year. The total could go higher if federal aid is dispensed quickly to Florida and Louisiana in the wake of Hurricane Andrew.
The red ink will flow even more heavily in 1993, no matter who gets the Presidential nod (chart). In particular, the thrift bailout will add greatly to next year's fiscal problems. In fact, the 1992 deficit would have been even larger except that Congress refused to provide funds to the Resolution Trust Corp. However, funding should resume next year, adding about $50 billion to government outlays and pushing the deficit to more than $380 billion, according to DRI/McGraw-Hill.
Would Washington's pileup of debt be of such concern if consumers felt more confident about their financial conditions? Probably not. Indeed, if the economy were proceeding along the typical recovery path, the campaign would hardly be centered on pocketbook issues.
But the reality is that consumers are worried, and only a big boost in employment is likely to lift their spirits. The Labor Dept. will release two more employment reports before the election, including the August data on Sept. 4. The strength or weakness of those two payroll reports could play a big role in who gets the top job at the White House for the next four years.JAMES C. COOPER AND KATHLEEN MADIGAN