The Recession Isn't Ready To Pull OutKaren Pennar
War can be many things. War is hell, war is waiting, war is gritty--and, as Americans have lately learned, war is a lethal video game. But for millions who watch from a distance, war is, above all, a huge distraction. Yes, life goes on, but with a dark, dreadful cloud above, reminding noncombatants as they work and play and go about their routines that all is not right with the world. Purchases are postponed, plans put on hold. The economy skids to a halt.
Now, the cloud is lifting, and prospects are looking brighter. For months--indeed, for longer than the campaign by U. S.-led coalition forces against the Iraqis has lasted--economists have said that once the war-related uncertainty is gone, the economy will revive. "Uncertainty is the enemy of positive thinking," notes Robert Dederick, chief economist at Chicago's Northern Trust Co.
However, not everyone is betting that the economic benefits of a collective sigh of relief will be powerful or long-lasting. A distraction, after all, keeps one's mind off nagging problems. For the past few months, war in the gulf has overshadowed recession at home. And even those who believe that Saddam Hussein's actions last August played a big role in triggering that recession doubt that an end to hostilities will quickly reverse economic fundamentals. "Rising consumer confidence will be a mild but not a wild positive," says Gail Fosler, chief economist for the Conference Board in New York. "There are still a lot of problems that people will be concerned about, like the employment picture."
It was the threat of war, starting last August, that precipitated a spike in oil prices and a plunge in consumer confidence. Within a couple of months, businesses were compounding the unhappy news with layoffs and production cutbacks. Because output contracted so rapidly, falling 2% in the final quarter of 1990, many economists believe that the recession would not have occurred without a push from Saddam. But the economy was clearly weak-kneed before the Aug. 2 invasion of Kuwait, and a spreading credit crunch was already threatening growth.
SPRING REBIRTH? Economists will quibble for years over what caused the downturn. But they're in basic agreement about the future: The recession should be over within a few months--with the cheeriest among them forecasting a springtime rebound that could jack up gross national product as soon as the second quarter. Most, however, don't expect to see solid gains in gross national product until the third quarter of the year. Only the gloomiest prognosticators envision the recession stretching to the end of the year.
Calling turning points in the economy is notoriously difficult, though forecasters--and journalists--keep on trying. For the next few weeks, readers of economic tea leaves are bound to seize on whatever available data bolster their case, and there is likely to be plenty of good and bad news to go around.
The optimists, for instance, were cheered by the Federal Reserve Board's half-point cut in the discount rate at the start of the month and buoyed by the resulting fall in interest rates. They've already greeted the stock market's recent rally with enthusiasm, certain that the market's role as a leading indicator will be vindicated.
The case for a speedy rebound got its latest boost when the Conference Board announced that its consumer confidence index, based on readings conducted through Feb. 16, edged up to 57.7 from 55.1 in January. The Conference Board's data showed that in most regions, consumers felt better about present and future economic conditions.
Many things would have to fall into place at once to bring about some of the rosiest scenarios, though. Take DRI/McGraw-Hill, whose most optimistic view predicts growth of more than 5% by yearend, running well into 1992. Confidence would have to climb sharply, while rates would have to resume their descent, with the 30-year bond rate falling to 7.20% (charts) from 8.15%. "I do believe that you can get some mutually reinforcing news that produces a virtuous cycle," says Roger Brinner, chief economist at DRI.
But the news may not break quite so favorably, and those who anticipate a speedy and dramatic reversal of the downturn, heralded by a sharp rise in confidence, could well be disappointed. "The psychological analysis is dead wrong," says Richard B. Hoey, an economist at Barclays de Zoete Wedd Inc. in New York. People didn't slash purchases of cars and furniture because they felt gloomy about the prospect of war, say Hoey and others, and they won't start spending because the war is over. Instead, he argues, their behavior--and, to a large degree, even their mood--has been driven chiefly by what's happened to real incomes.
That hasn't been good. Real disposable personal income, after inflation and tax payments, tumbled at a 3.7% annual rate in the fourth quarter of 1990. The big reason: Business wasted no time in slashing payrolls and cutting production over the past few months. The speed with which business responded, first to the threat of lower spending, then to the actual slump, surprised most analysts. And some believe that even the end of the war won't arrest the trend. "We've still got a layoff wave ahead of us," says Hoey, who predicts that further inventory liquidations will force companies to let more workers go.
That process will stop, and rehiring will start, once demand starts picking up. So far, though, the signs are mixed at best. Auto sales were slogging along at a 6 million annual rate in mid-February--better than late January's low of 5.4 million but well below year-ago levels. Housing starts in January fell to an annual rate of 850,000, the lowest rate in nine years. Durable-goods shipments picked up in January, but durable-goods orders fell off.
STANDING PAT. What would jump-start demand and get the economy moving again? The same medicine as always: easy money. The big unknown today, though, is whether the Fed has loosened the spigots enough to give lending and spending a sufficient kick. The Fed is battling a months-long credit crunch in which banks have been unwilling to lend to many borrowers. Now, spooked by the recession, more borrowers may be unwilling to take out loans, even at lower rates. While there is some anecdotal evidence that home buyers who held off buying are sniffing around, rates don't appear to have fallen far enough to revive the economy.
But once the war ends, the Fed is unlikely to slash rates further. Chairman Alan Greenspan and board members don't want to err too far on the side of ease and overstimulate the economy. DRI's Brinner calls a further cut in rates "catastrophic insurance" and says the Fed could easily afford to buy it. But for now, the Fed is signaling that it will stand pat. So at least on the home front, peace will spell nothing flashier or faster than a gradual climb out of recession by midyear.