Upbeat Mood May Just Be Wall Street ‘Whistling Past the Graveyard’

The consensus now seems to be that the United States will avoid a recession this year, as consumer spending slows--but does not fall through the floor--and any cuts in consumption are offset by higher exports and robust capital spending. Indeed, there is some evidence to support this camp. Chain store sales through January did not collapse, and nonstop auto rebates have generated respectable sales, even prompting some Detroit auto makers to recall laid-off workers. Moreover, three years of a declining dollar and continuing efforts to control costs finally seem to be shrinking the trade deficit.

But the euphoric mood just months after the greatest stock market crash in the country’s history rang a bell and led me to wonder where I had seen such an upbeat spirit before. Anatole Kaletsky, writing in the London Financial Times, helped jog my memory, noting: “When the New York Times looked back on 1929 in its Dec. 31 (1929) issue, it felt so relaxed about the stock market and the economy that it chose Commander Richard Byrd’s expedition to the South Pole as the most memorable news event of the year.” It seems that the October, 1929, stock market crash was the last thing on anyone’s mind.

The press wasn’t the only august group to slight the possible impact of the 1929 crash. The National Economic League, a business organization, chose administration of justice, Prohibition, lawlessness, crime and law enforcement as the leading problems for the United States in 1930. Unemployment did make it onto their list--in 18th place.

The reality is that in January, 1930, the country was already six months into a recession. Unemployment, which stood at 750,000 in September, 1929, had risen to 3 million at the beginning of 1930 and would rise to 7 million by the end of the year. By the end of January, the level of industrial production was down 11.1% from its peak August, 1929, level and retail sales, despite initial reports suggesting that Christmas sales were almost up to the record levels of 1928, were down 4.4% in the five-month period.

In the three months from November, 1929, to February, 1930, gross national product dropped 5.6% in current dollars, as both the consumer and business cut back on outlays. The index of department store sales dropped 3.5% as skittish consumers cut back installment debt 2.5%, and a 5.7% fall in the average workweek cut into disposable income. With corporate profits down 42.6%, business responded by cutting back expenditures on new plants and equipment 12% in current dollars.

Although the 1929 economy showed signs of weakening in the first three quarters, it absolutely collapsed in the fourth. Consumer outlays dropped 17.3% on an annualized basis, and private construction plummeted 41.3%.

Still, the pundits were undeterred. In early 1930, there was talk of a “little bull market.” By April 30, the stock market had recovered 50% of the losses suffered in the October, 1929, crash. On May 30, 1930, the secretary of commerce said: “Normal business conditions should be restored in two or three months.” A month later, the secretary of labor echoed: “The worst is over, without a doubt.” Stocks would not reach their 1930 high again until 1954.

If nothing else, the events of 1929 should at least alert us against complacency. But are most forecasters again refusing to see the potholes ahead? As we enter 1988, unacceptably high levels of debt in every sector of the economy--government, corporate and consumer; the flood of imports, financed by foreign borrowing, that continues to suck purchasing power out of the United States, and the high level of inflation-adjusted interest rates, still weigh heavily on the economy.

Patterns Are Similar

As I pointed out in my 1986 book, “The World Has Definitely Changed”: “The parallels between the world now and that of the late 1920s are indeed frightening, and the possibilities that a 1930s-style Depression occurs cannot be completely ruled out.” These parallels include the fact that we are in an era of worldwide surpluses; the switch from runaway inflation to deflation; an international debt crisis, and the onset of protectionism.

Then, as now, there was no clear world leader to control protectionist pressures. U.S. agriculture was in terrible shape by the late 1920s; this time, U.S. agriculture, mining, energy and manufacturing are all in trouble. The flattening in real personal income per household since 1973 following more than two decades of growth is also similar to the pattern in the early part of this century.

Before the stock market crashes of October, 1929, and October, 1987, financial markets were booming. Speculative vehicles were readily available both then and now. In the last decade, however, there has been speculation in both tangible assets and financial instruments. The result is overbuilt real estate, especially in the Oil Patch, over-leveraged companies, and shaky savings and loan firms.

Many on Wall Street want to hear any forecast that avoids a recession, or worse, but I have to wonder if they are just whistling past the graveyard. I believe that the probability of a 1930s-type Depression is no greater than 10% to 20%, but the consequences are so great that they cannot be ignored.