Where's The Growth?by
This is not the way the story was supposed to go.
When the gulf war ended in February, the U. S. economy seemed ready to snap to and march onward toward recovery. Revitalized consumers opened their wallets and started spending again on homes, cars, and other big-ticket items. Manufacturers called back laid-off workers, and factories started humming again. By July, the recession of 1990-91 looked like a finished chapter for the record book.
But as these autumn days dwindle to a precious few, the economy is looking more and more wan. Responding to mounting signs that the economy is sinking into a coma, the Federal Reserve cut its discount rate -- the interest it charges on loans to banks -- by half a percentage point, to 4.5%. Banks quickly took the cue, lowering their prime rate a half point, to 7.5%. Trouble is, all this easy credit still may not be low enough to shake the economy awake. Without further cuts in rates, or some other dramatic lift for the economy, the recovery may not start in earnest until the new year.
The malaise is even infecting parts of the economy that were supposedly immune. Manufacturers, who were expected to lead the U. S. out of recession, instead are shrinking back. Facing uncertain consumer demand at home, sluggish markets overseas, and stiff foreign competition, manufacturers in August began slashing payrolls. Today, factory employment is 17,000 below its level in April, when many economists think the recovery began. By firing rather than hiring, explains economist Ed McKelvey of Goldman, Sachs & Co., "they broke the link that keeps the economic cycle going upwards."
HOLDING PATTERN. That's why the economy needs another jolt. The latest government statistics are almost uniformly depressing (charts). Unemployment is up, durable-goods orders are trending down, new-home sales have plunged, and car sales are just plain appalling. Moreover, consumers and businesses are loath to take on new debt. "The economy is, if not outright stalled, certainly in an extremely slow growth pattern right now," says Michael J. Durham, senior vice-president for finance at AMR Corp., American Airlines Inc.'s parent.
AMR is far from being the only company that foresees an extended period of little or no economic growth. Much of Corporate America is cutting costs in hopes of lowering their break-even points (page 39 29 ). The least fortunate among them may be Pentagon contractors, which face huge defense budget cuts (page 41 31 ). And even the professional pols in the White House are panicking as the Administration's optimistic economic forecasts appear to be falling short, with potentially unhappy consequences for Republicans in 1992 (page 42 32 ). With his grades for handling the economy falling ever lower in the polls, President Bush on Nov. 5 canceled a long-scheduled trip to Asia and will concentrate instead on domestic affairs.
The outlook isn't uniformly gloomy. Personal income continues to grow, albeit slowly. Productivity in the third quarter rose by a hefty 2.4%, helping to boost U. S. competitiveness. The inflation rate is declining to below 4%, a level not seen for almost 20 years. That should help to push long-term interest rates even lower, making business investment and housing cheaper -- and assuring that the economy will eventually come back to life.
FACTORY FIZZLE. But at the moment, it's getting harder to focus on the bright spots. Take autos, for example. After peaking this year at an annual rate of 6.8 million in July, car sales have now fallen back to 6 million. Ford is shuttering two plants because of slack orders from rental fleets. And while fourth-quarter auto output is still planned to be up 9.4% from last year's levels, those optimistic plans are being scaled back almost weekly. As the auto industry hunkers down, it drags with it a big chunk of plastics, steel, and even electronics production. Says David M. Hoag, chief executive of LTV Corp., a Dallas-based steelmaker: "The order books have been strong the past four or five months, largely because of auto industry orders. But the news isn't good."
Or, you might say the news is just plain bad. Layoffs keep mounting in many service industries, with banking and retailing two notable examples. The unwillingness of many shell-shocked bankers to make loans is starving a wide swath of businesses. Taken together, these woes have left businesses crawling around in a decidedly gloomy atmosphere, more concerned with surviving the present than investing for the future. Says one senior Fed official: "In the business community, the power of negative thinking seems to be sweeping the economy."
The retrenchment by manufacturers is an especially bitter disappointment. The conventional wisdom on manufacturers was that they already had worked off their fat. Factories, the thinking went, would be one of the few sources of growth for the early 1990s. Now, depressingly, it is turning out that many manufacturing companies are continuing to chop jobs.
One reason is the dramatic worsening of the U. S. trade deficit since June. Demand from abroad was supposed to give manufacturers the push they needed to get the U. S. economy growing again. Indeed, export markets were a ray of sunshine while the rest of the economy struggled with recession.
Since April, as economies overseas turned sluggish, exports have been running flat. America's biggest trading partner, Canada, seemed to be pulling out of its recession. But in August, its economy again began to contract. Germany now is struggling, and U. S. exports there have fallen by 35% since April. Britain, one of the biggest buyers of U. S. exports, is now slowly emerging from a fierce 18-month recession. "Last quarter disappointed us. Europe is slipping, and we had only little pockets of improvement in the U. S.," says Senior Vice-President Mac Sims of Clark Equipment, a forklift maker that gets about 40% of its revenues from overseas.
Making matters worse for the trade gap, imports in July and August surged far faster than anyone anticipated. That means foreign companies took business away from U. S. manufacturers and probably cut more than a percentage point off third-quarter gross national product, which grew at an annual rate of 2.4%. If this tide of imports keeps rising in the fourth quarter, says David D. Hale, chief economist at Kemper Financial Services Inc., "we're in far worse trouble than anyone realizes."
Faced with that challenge from abroad, manufacturers are trying to cut labor and other costs. Look at Du Pont Co. The chemicals giant is in one of the few industries that has maintained employment during the recession. But to keep a competitive edge on foreign rivals, the company has embarked on a cost-cutting program that some analysts estimate could trim about 15,000 jobs, or 11% of its payroll. Hewlett-Packard Co., another generally successful company, is trimming about 3,000 employees, or 3%, from its payroll.
'IN LIKE A LION.' Other manufacturers are shrinking because their chief client--the Pentagon--is slashing items off its shopping list. Defense cuts are especially tough at companies in New England, California, and Texas. A week ago, Stratford (Conn.)-based Textron Lycoming, which makes engines for tanks and helicopters, announced plans to cut 16% to 20% of its work force--500 to 800 jobs--over the next two to three years. And General Dynamics Corp.'s Electric Boat Div., the submarine builder based in Groton, Conn., laid off about 1,000 employees this year and expects defense cuts to lead to a halving of its 17,000-worker payroll within four years.
With all these layoffs on the horizon, it's no surprise that consumer confidence is plunging. That goes double for homebuyers. The residential housing market is on the rocks despite the lowest mortgage rates in 14 years. "The real estate market came in like a lion and went out like a lamb," says Barbara Corcoran, president of the Corcoran Group, a New York City real estate firm. "June and July exceeded our optimistic expectations, but we were shocked at how quickly it tapered off through August and September." She reports that business since the end of the summer is 50% below last year's already depressed levels.
PARALYZED. What could get the economy growing again? A pickup in world growth, for one thing, would help stimulate businesses from accounting firms to computer makers. But that isn't something the U. S. can control. Fresh government spending, a traditional stimulus, looks unlikely for now, too. Uncle Sam is paralyzed by a record deficit that in the fiscal year ending next September is seen hitting $325 billion. Indeed, budget cuts and tax increases at the state and local government level are draining strength from the economy at just the wrong time.
That leaves the Fed, which has been cutting rates steadily, but less quickly than economic performance seems to demand. Eventually, a respectable recovery will come--the Fed already has done enough to assure that. The question is when. If it's to happen soon, rates must fall sharply. Otherwise, the economy may be stuck in a netherworld between recession and expansion for some time.