Fasten Your Seat Belt, Bill, It's Gonna Be A Rough Ride For A While

The sign in President-elect Bill Clinton's campaign headquarters in Little Rock says it all: "It's the economy, stupid!" That note kept Clinton's election bid focused on the key issue, which he rode all the way to the White House.

Now comes the hard part. What makes the President-elect's task unusually difficult is the long-term nature of many of the economy's problems and Washington's diminished power to do anything about them. The limitations placed on both fiscal and monetary policy by record federal deficits and other structural impediments only complicate the job of finding solutions that everyone can live with--especially the financial markets.

The earliest that any policy initiatives could lift the economy would be the second half of 1993. But any boost is likely to be small, because of fiscal constraints. Unless the economy really hits the skids, there might not be much urgency to implement a budget-busting stimulus package. Such a nostrum runs the risk of pushing up long-term interest rates and placing fiscal and monetary policies at loggerheads.

Although the President-elect inherits a struggling economy, he also gets four positive fundamentals that may eventually obviate the need for fiscal pump-priming. This quartet of declining inflation, low interest rates, faster productivity growth, and better profit margins is paving the way for continued, if only modest, growth.


In a campaign peppered with charges of waffling, it was actually the economy that made the biggest zigs and zags. And Clinton's victory won't turn the economy around overnight. The latest set of data on the factory sector, home demand, and construction suggests that solid growth will remain elusive well into 1993. In particular, the leading indicators hint that the economy will still be struggling come Inauguration Day (chart).

In fact, the economy's path through the Clinton Administration's first 100 days was set well before Nov. 3. Consumer confidence might perk up now that some uncertainty has been resolved, but consumers' difficulties are deeply rooted in financial problems and job insecurity. The economy should continue to grow, but it will probably be at a pace near the lower end of the 1% to 3% range the recovery has been mired in for the past 112 years.

One ray of sunshine might be the downtrend in new jobless claims. Through mid-October, the four-week average of claims had dipped below its September level. But it is still too early to tell if this decline reflects better labor markets or just transitory effects following the hurricanes and strikes in late summer.


Elsewhere, there are lots of negatives in the outlook. The newest problem area is manufacturing. According to the Federal Reserve's latest regional summary of business activity, growth in the economy continued at a "slow and uneven pace" in late September and October. However, the Fed also noted, "the manufacturing sector apparently lost some momentum in much of the nation."

Factories are losing steam because of weak demand. New orders for both durable and nondurable goods rose 1.1% in September, but that followed two consecutive declines. Bookings in the third quarter remained below the second-quarter level.

The pace of new orders continues to lag behind that of factory shipments. Shipments rose 1.8% in September, partly rebounding from a steep 2.5% drop in August. A`though the boost in shipments helped to cut inventories by 0.3%, the backlog of unfilled orders continued to slide. That's why the factory sector was struggling at the beginning of the fourth quarter.

Indeed, that's the latest word from the National Association of Purchasing Management. The napm's index of industrial activity edged up to 50.6% in October from 49% in September, barely clearing the 50% hurdle that indicates that manufacturing is growing, not declining (chart).

The NAPM said production, orders, and export demand lifted the index, but employment remains a sore spot. The uptick in demand, both at home and abroad, is clearly good news for manufacturers, which are facing increasingly empty order books. However, the napm cautioned that orders will have to rise further if economic growth is to show more vigor.

And vigor is not the message from the leading indicators. The leading index--a composite of 11 indicators that foreshadow the economy's future--slipped 0.3% in September, the third drop in four months. The slippage in the index suggests the economy will be hard-pressed to grow by more than 2% in coming quarters.

In addition, the continuous drop in the index of coincident indicators--which tracks the current state of the economy--is particularly disconcerting. The index fell by 0.3% in September, on top of a 0.6% plunge in August. It is now at its lowest level in five years, suggesting that the recovery from recession has not even begun yet.

The sagging coincident index certainly implies that the third-quarter jump of 2.7% in real gross domestic product was out of whack with reality. The index last quarter was below the second-quarter average.


The latest reports on the housing market and construction also suggest that President-elect Clinton has tough work ahead. Although new-home sales seem to be doing well, overall construction is still wrestling with too much commercial real estate.

Construction spending increased 1.3% in September, reversing a 1.1% fall in August. Most of the seesawing came in public spending. Government outlays rose 2.1% in September, after dropping 2.3% in the previous month.

Private construction increased 1.1% in September, led by a strong advance in the residential sector. After making no headway in early summer, homebuilding jumped 1.9% in August, and then rose an additional 1.6% in September. Renewed signs of life in housing demand are prodding builders to strap on their tool belts again.

Indeed, new single-family-home sales rebounded nicely last quarter, after dropping in the second (chart). Home sales fell 1% in September, to an annual rate of 617,000, but that followed four solid gains in a row. Sales for the entire third quarter were at a 618,000 pace--the best quarterly sales rate in nearly three years.

Increased buying is clearing out much of the inventory of unsold homes across the country. In September, the supply of unsold homes stood at an extremely low 5.3 months, in contrast to 7.2 months a year ago. This lean inventory should help to boost housing starts in the fourth quarter and give a lift to the economy this quarter and into early 1993.

Builders of commercial projects will continue to fare poorly, though. Nonresidential construction was virtually flat in September after two huge losses in July and August. Moreover, the latest data on building contracts suggest that even fewer new projects are being started.

The F.W. Dodge Group of McGraw-Hill Inc. reports that new building contracts fell 2.7% in September. But contracts for nonresidential construction plunged 5.3%--the third consecutive drop. For the third quarter, agreements to build commercial real estate are down 8.1% from a year earlier. Nonresidential contracts are at their lowest level in 812 years (chart).

That means office and industrial construction will remain a drag on the economy into 1993. Indeed, the overhang of office space is one of those structural problems that will hamper this economy, regardless of who had won the White House.

Finally, though, the 1992 campaign is ended. With its debates, mudslinging, and infomercials, this election may well have been one of the hardest-fought in the postwar era. But Clinton's toughest challenges lie ahead. He may discover that rallying the voters was child's play compared with rallying this economy.

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