Industrial Companies Face More Cutbacks

The best that can be said about the factory sector is that it's not sinking as fast as it was. That was the message from the latest report by the National Association of Purchasing Management. The NAPM's index of industrial activity rose from 38.5% in February to 40% in March, the second consecutive increase (chart).

However, when the index falls below 50%, it means that manufacturing is in a recession, and a reading below 44% means the entire economy is in a downturn. Except for May, 1990, when the index barely came up for air at 50.1%, it has been below the 50% mark for almost two years, about the same length of time that factories have been cutting their payrolls.

Job losses and production cuts seem likely to extend into the spring months. Car sales have not picked up after the war the way they were expected to do. Some big computer companies are not meeting their expectations for first-quarter earnings. And manufacturers generally may be facing moderately excessive inventories, the result of the extremely sharp falloff in demand in the fourth and first quarters.

The Commerce Dept. reported that factory inventories in February were unchanged, but that factory shipments fell for the fourth consecutive month. As a result, the ratio of inventories to shipments has risen sharply in recent months. And in March, the NAPM raised the same red flag, reporting the increased difficulty in cutting inventories in a declining economy.

As with manufacturing, the outlook for the construction industry is none too bright. In February, construction spending dropped by 0.1% -- the 11th decline in a row. Homebuilding fell a sharp 3.7% in February, while outlays for nonresidential projects were off by 0.5%.

The downturn isn't likely to end soon. The F. W. Dodge Group of McGraw-Hill Inc. reports that the value of contracts for new construction fell by 1% in February. That means building activity -- especially housing -- is likely to remain weak going into the important spring building season. The jump in February data for housing starts and home sales may have been strongly influenced by the month's unusually warm weather coming after a colder-than-normal January.


With little help expected from construction or manufacturing, the economy's fate continues to rest with consumers, whose spending totals two-thirds of real gross national product. The problem is that consumers have the optimism and desire to spend--but not the cash.

Consumer spending did show some bounce in February. It rose by 0.6%, to an annual rate of $ 3,729.8 billion. But after price adjustments, the 0.4% increase provided little offset to the 1% plunge that real spending took in January. And the early indications for March suggest that consumers fell flat on the ground again last month.

New-car sales accounted for 60% of the February gain. But car buying simply went from dismal to poor, and auto demand in March remained weak.

Spending on other durable goods, such as appliances and furniture, also rose in February. That increase may have been related to the same weather patterns that helped to trigger the 16.2% surge in new single-family home sales in February, to an annual rate of 467,000.

Some home buyers in February may have responded to lower mortgage rates. But the March rebound in long-term interest rates suggests that the February sales gain was not repeated last month. And that could mean sales of household goods fell back as well.

Demand for other items sagged in February. Real spending on nondurable goods fell 0.2%; it hasn't posted a gain since September. Outlays for services were flat in February, after dropping 0.2% in January. In total, real consumer spending is running at an annual rate of 3.2% below its pace of the fourth quarter, when it dropped 3.4%. That's shaping up to be one of the largest two-quarter declines in the postwar era.


Consumer spending--and the economy as a whole--won't recover until income growth shows some sign of life. In February, personal income rose a slim 0.2%, or just 0.1% after accounting for taxes and inflation.

In the past year, real aftertax earnings have fallen by 1.3% (chart), and they are on track to shrink at an annual rate of about 1.5% in the first quarter, the third quarterly decline in a row. This is the longest sustained drop in real incomes in the postwar era, and one of the largest.

Little wonder, then, that household balance sheets are so strained. The savings rate hasn't risen in the past three years. It has remained near the 4.4% posted in February, far below the 6% to 7% trend prior to the 1980s. At the same time, consumers are carrying a record burden of debt. Going into 1991, the outstanding mortgage and installment debt of households nearly equaled their annual disposable income. That's a heavy debt load compared with the 1960s and 1970s, when debts totaled only two-thirds of income.

Already, some debt-laden consumers are running into trouble. Personal bankruptcies are increasing. The delinquency rate on credit-card balances rose to a four-year high in the fourth quarter, and with incomes falling and unemployment rising, it will rise further in 1991.

At a time when real incomes are declining, savings are historically low, and an increasing portion of household earnings are needed to pay off existing debts--especially mortgages--a consumer recovery will be extremely difficult to get off the ground. And that means there is probably not as much life in the economy as the bounce in some of the recent data might suggest.

Before it's here, it's on the Bloomberg Terminal.