A Recovery To Rival The '80s?By
Look closely, and you can see that the foundation of an economic recovery is starting to take shape. The housing market is improving. Consumer confidence is out of the recession zone. Manufacturing orders are up. The recession's end looms nearer.
The good news, though, seems to be bringing little joy. Most economists are forecasting a recovery that feels little better than the current slump. Weighed down by too much debt, consumers will keep a tight grip on their wallets. The banking system's credit strains will further dampen the upturn. And severe state and local government budget woes will make it harder for the economy to bounce back. Punch in the numbers, and America's real gross national product expands by a mere 2.5% or less in the first year of recovery, far short of the average postwar gain of 6%.
MORE PIZZAZZ. That consensus could be too gloomy, though. Yes, the lingering hangover from the 1980s' excesses will temper the strength of the rebound. But in many other respects, the economy is in better shape than it was coming out of the last recession (charts). Inventories are leaner, so even a slight rise in spending could propel a sharp snapback. The federal budget deficit is less of a drag on the economy. Long-term interest rates are lower, and U. S. businesses are no longer hobbled by a much steeper cost of capital than their foreign competitors. Better yet, strong demand for U. S. goods abroad could spark a huge capital spending boom here at home.
Add it all together, and the economy's prospects suddenly look brighter. The economic consulting firm WEFA is forecasting 3.5% growth next year, a pace about even with the 1980s expansion. Stephen S. Roach, chief economist at Morgan Stanley & Co., expects 4% growth in the first year of recovery. Even America's most cautious prognosticator, Federal Reserve Board Chairman Alan Greenspan, told the International Monetary Conference in Osaka, Japan, on June 5 that "the probability of a stronger-than-expected recovery is slightly rising."
To be sure, predicting when a recession will end is known to be hazardous to forecasters' health. At the moment, each sign of improvement seems to be offset by a dismal statistic. Many businesses see little tangible proof of the recovery. "The general U. S. economy stopped going down four or five months ago," says Aluminum Co. of America CEO Paul H. O'Neill. But "right now, we're bouncing on the bottom."
Still, whether the recovery is just beginning or will wait until winter, what matters to most people is the nature of the upturn. If the stage is being set for a healthy revival, the 1990s could well turn out to be a decade of strong, sustained growth.
It's businesses' need to rebuild their spartan inventories that could give pizzazz to the initial stages of recovery. Companies liquidated stocks at a $25.5 billion annual rate in the first quarter, following a hefty $28 billion sell-off late last year--one of the largest two-quarter drawdowns since 1945. Many companies are running so lean that even a modest sales uptick could set factories humming again. In Detroit, for example, car sales rose to an annual 6 million units in May, up from April's 5.5 million pace. The Big Three carmakers are now recalling second shifts and adding overtime at a few factories.
INFLATION? The recovery may not stop with inventories. U. S. manufacturers are under pressure to boost long-term capital spending to meet growing overseas demand for U. S. goods and services. A further spur to investment is slow growth in the size of the work force. In the 1980s, the work force grew at a rate of 1.6% annually, compared with a projected growth rate of 1.2% in the coming decade. Companies will have to spend money on labor-saving technologies, promising a boost in productivity.
Luckily for Corporate America, higher levels of investment spending are becoming more affordable. Long-term interest rates, after factoring out inflation, are at their lowest level in years. Indeed, the cost of capital for U. S. companies is now about even with that of foreign rivals. Moreover, America's labor costs stack up well against the rest of the industrialized world. For example, on the basis of manufacturing costs alone, it's as cheap for Bausch & Lomb to make a contact lens in the U. S. as anywhere else, says Ronald L. Zarella, president of Bausch & Lomb's international division.
Wait. Doesn't all this growth spell inflation? If so, bond investors would drive interest rates higher. And rising rates would choke off capital spending.
That's not too likely, actually. Interest rates will periodically spike up on inflation scares. But inflation rates have been trending lower. Wage gains have been tame. Commodity prices, including those of aluminum and copper, are down. And the recession has brought the core rate of inflation down to 4.4% over the past three months, sharply lower than the average of 5.2% in 1990. If history is any guide, inflation should fall even more in the recovery's early stage, because companies tend to hold the line on price hikes as they try to boost sales. Competition for market share around the world should keep future price hikes modest.
'EXPORT-ORIENTED.' Another factor keeping interest rates up in the 1980s will probably be less oppressive in coming years: the federal budget deficit. Economists at Salomon Brothers Inc. estimate that the budget deficit, adjusted for recession, deposit insurance, and the Persian Gulf war, is going to sink to 2.1% of GNP in 1992--the lowest level since 1982.
When the expansion arrives, it might not look anything like the 1980s, a decade of consumption, debt, and huge capital flows into unproductive real estate. In the 1990s, hefty investment in productive technologies and rising global competitiveness could be the hallmarks of the era. "We will become savings- and export-oriented," says Edward Guay, chief economist at Cigna Corp. "We will exchange stereotypes with Germany and Japan." If so, this is one recovery that the economic clerisy will anoint as far from anemic.
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