Federal Reserve Chairman Paul A. Volcker, asked today if the country could be headed for recession, said the soaring trade deficit put the nation in a "difficult and dangerous situation."
Volcker, appearing before the House Banking Committee, said the country's huge trade imbalance with the rest of the world is one of the biggest problems facing the United States.
The Fed chairman said the strains normally associated with the beginning of a recession are not present now, but he warned that the United States exists in a "more complex world," with the country's economic fortunes tied more than ever before to the performance of the world economy.
"The decline in the trade balance--the longer it persists, the more difficult and dangerous situation we are in," he said. "That is clearly a very vulnerable point in the economy."
Volcker, pressed to forecast whether the slowdown in economic growth could worsen into a recession, said Fed policymakers are "not, as a group, anticipating" a recession.
"The harbingers that are normally associated with a near-term recession are absent, but we live in a more complex world," he said, noting that the sluggish growth that has plagued the United States for the last two years has come in large part from the huge trade deficit.
The trade imbalance has caused a virtual recession in U.S. manufacturing industries as domestic producers have lost sales both at home and abroad to foreign competitors.
The Reagan Administration has tried to fight the trade deficit by pushing the value of the dollar lower against foreign currencies. A weaker dollar makes imports more expensive for Americans and lowers the price of U.S. goods on foreign markets.
This strategy has failed so far to improve the trade balance. Volcker said that although the improvements from a lower dollar should begin to be felt in coming months, the decline in the dollar would not by itself correct the problem.
Volcker's testimony came a week after he presented similar warnings to the Senate Banking Committee. In both appearances, he called on America's major trading partners in Western Europe and Japan to do more to stimulate growth in their countries.
The testimony pointed out that in the last 3 1/2 years, the United States has provided much of the momentum for worldwide economic growth. The testimony said that other countries need to do much more to boost their growth rates to provide markets for U.S. manufacturers.