Is The Worst Over?Christopher Farrell
You don't have to be an expert to see recent signs of strength in the U.S. economy. On weekends, New Jersey shoppers are finding the state's acres of malls more crowded. Retailers once again are advertising for holiday help. Judging by the activity in the real estate market, buyers have stopped worrying about whether new-home prices have bottomed out and instead are thinking about color schemes for their new living rooms. And newspapers and magazines are filled with optimistic predictions about the changes planned by a new President.
Suddenly, Americans feel better--or so the University of Michigan says. Its widely followed survey of consumer confidence soared by more than 10 points during the first half of November--to its highest reading since the March, 1991, end of the war with Iraq (charts). That's not the only measure that points to better times ahead. Retail sales are up. The money supply is growing. The inflation outlook is as sunny as it has been in some 30 years. Commercial and industrial loans by banks have increased by more than $12 billion since late August. Need another piece of evidence? United Parcel Service Inc. says that its package shipments have been rising, particularly in the past two months.
Add it all up, and "the tempo of the economy is picking up," says David Jones, economist at government bond dealer Aubrey G. Lanston & Co., who in past weeks has become more optimistic about the economy's prospects. Says Bruce Steinberg, a Merrill Lynch & Co. economist: "We may finally be at that point when we get the virtuous circle of everything coming together and the expansion gets going."
EASY STREET? What a break for Bill Clinton. If the economy accelerates on its own, he may be able to deliver on his campaign promise to boost growth and employment without resorting to the sort of aggressive, budget-busting stimulus plan that has fixed-income investors worried. Odds are that the President-elect will stick with his plans to boost investment through infrastructure spending and tax incentives. That will cost around $25 billion in 1993, or less than 0.5% of the nation's gross domestic product, estimate economists at Goldman, Sachs & Co.
That's if he's lucky. None of the government's numbers, or the experts' predictions, so far add up to a rip-roaring rebound. While the GDP expanded at an annual rate of 2.7% in the third quarter, some forecasters, such as DRI/McGraw-Hill, expect the number to come in at just 1.8% in the fourth quarter. The defense industry keeps contracting, savaging California, which represents 13% of the nation's output. U.S. exports are vulnerable to the economic slumps in Europe and Japan. Worst of all, jobs are tough to find, and layoffs at giant corporations are still disturbingly frequent. "I'm scared to spend money because I don't know what's going to happen next," says Linda L. Davidson, a clerk at Fun Watches, a store in Mesquite, Tex.
And some of Clinton's ideas to spur investment-led growth could backfire on the economy in the short run. To spur business purchases of new machinery and equipment, for example, the President-elect wants an investment tax credit. Good idea--but businesses could hold off on purchases until they see whether Congress phases in a tax credit. "Giving tax breaks is fine, except my customers are going to wait to see what he does about that," complains Mike H. Richards, vice-president at Shamrock Machinery Co. in Houston. "If he waits six months to do something, that means we'll have to wait six months before our customers do anything."
Just the same, worries of only a few months ago about a "triple dip" into recession seem increasingly remote. What happened? Maybe it's that America's efforts to work off the excesses of the 1980s during the hard times of the past three years are finally paying off. Ruthless cost cutting, combined with managing for quality, has boosted corporate productivity growth to a 2.6% annual rate, vs. 1.3% last year. Corporate earnings are up by more than 30% from a year ago. And businesses have streamlined their balance sheets: Between the first quarter of 1991 and the third quarter of this year, the share of business cash flow devoted to net interest payments fell from 26.2% to 20.7%.
Consumers have been almost as adept at repairing their finances. Americans now spend about 16% of their disposable income on debt payments, down from 18.2% at the start of last year, estimates Mark Zandi, economist at Regional Financial Assoc. And home buyers have taken advantage of lower interest rates engineered by the Federal Reserve. Thanks to low rates, Patti Coyne, a 44-year-old elementary school teacher, was able to buy a house near Pittsburgh in October. She fixed it up and now is renting it out at a profit. "A middle-class person can use this lower rates to get slightly ahead," Coyne says.
QUIET HIRING. Look closely, and there are even some positive signs in the tepid U.S. job market. The job-creation numbers show that private employment has barely increased. But initial unemployment claims have dropped to their lowest level since the middle of 1990. Indeed, the Labor Dept. estimated that business startups created 50,000 new jobs, up from 10,000 in the first quarter of 1992. And such white-collar industries as securities and investment firms, advertising agencies, and consulting and other management services companies are showing new strength. Hard-hit by the recession, such business quietly increased payrolls at a 5.1% annual clip in the third quarter.
Harder to measure is the surge in optimism created by Clinton's victory. For months, the Presidential election's uncertain outcome had clouded business and consumer expectations. Some simply may be relieved that the din of the campaign has abated. But the prospect of new leadership in Washington seems to have many Americans feeling hopeful. "I'm looking forward to renewed optimism and activism on the part of the government, as opposed to the hand-wringing in the last Administration," says Paul J. Choquette Jr., chief executive of Gilbane Building Co., a construction company in Providence that has been hard-hit by the economy's slump.
Come January, taking a true reading of the economy's pulse will be Clinton's toughest job. True, even if solid signs of recovery don't peter out, as has happened several times in the recent past, the economy will still need a jolt of government spending. The reason: Today's rising confidence among consumers and businesses that 1993 will be better than 1992 is based partly on expectations of a modest fiscal package designed to ensure that the recovery picks up steam. But the stronger the economy, the less pressure Clinton will face to sharply increase the federal budget deficit. In politics, the business cycle is everything.