Industrial Output Rise, Housing Rebound Point to Economy’s Resilience
Prospects that the U.S. economy will avoid a recession this year appeared to brighten Wednesday as the government reported a strong rebound in housing starts for February as well as a gain in industrial output for the fifth straight month.
“Both numbers were stronger than expected--and both of them tell us that the economy is in much better shape after the stock market crash than many people feared it would be,” said David Wyss, an economist with Data Resources, a consulting firm in Lexington, Mass.
The Commerce Department said new housing construction, which plummeted after the Oct. 19 stock market debacle, leaped 8.9% in February from the previous month. Separately, the Federal Reserve Board reported that industrial output--a gauge of activity in the nation’s factories, mines and utilities--grew at a modest 0.2% pace for the month.
The new statistics, while lackluster by some interpretations, nonetheless follow other clues that the economy retains more vitality than had been foreseen after the crash. Analysts have cited strong employment growth and auto sales this year, for example, as signs that the United States may may make it through 1988 without tumbling into a recession.
Two Surveys Released
“Looking at all the pieces, I think it shows that the economy is still firmly launched on a growth track,” declared Norman Robertson, chief economist with the Mellon Bank in Pittsburgh.
To further confound those who saw 1988 as a year of economic gloom were two surveys of business expectations released Wednesday. The more upbeat was a poll of 1,500 executives by Dun & Bradstreet, a New York research firm, which found that executives were increasingly optimistic that sales and profits would rise in the coming months.
A separate survey of 398 employers by the Bureau of National Affairs, a publishing company, yielded more mixed results. It found that job prospects for production and service workers are the best in three years, but that the outlook for technical, professional and office workers was declining.
Responding to the new government figures, Kathleen B. Cooper, chief economist with Security Pacific National Bank in Los Angeles, said that while current economic growth appears less than spectacular, “that’s a long way from a recession.”
Indeed, many analysts feared that the new economic statistics would portray a much darker picture. Housing starts--which were 17% lower than the rate a year ago--still represented a turnaround from the plunging rates of December and January, which were five-year lows.
John Tuccillo, chief economist with the National Assn. of Realtors in Washington, said the new figures signaled a return to normal housing activity, abetted by a drop in fixed-rate 30-year mortgages. Such mortgages, now in the 9.8% range, are almost two points below their recent peak last autumn. “Housing will not be the engine that drives the economy’s growth,” Tuccillo said. “But it’s not going to be the brakes of the train either.”
In contrast to most of the country, the new data suggests that California has experienced particularly sluggish growth in residential construction. The Commerce Department reported that such building in the West--a measure that largely reflects housing activity in California--fell 9%.
According to Joel Singer, chief economist with the California Assn. of Realtors, such statistics highlight a regional slump in the construction of apartments and other multifamily buildings, an area hurt by high vacancy rates and tax changes that have made such investment less desirable. “We see a continuing weakness on the multifamily side,” he said. Singer added, however, that he expected future strength in single-family housing construction because of continuing demand for homes and a persistent short supply.
On close examination, the industrial production figures showed areas of weakness as well, coming after a slightly larger 0.3% increase in January. “The big story is that industrial production is still growing--but the growth has decelerated,” observed Michael Penzer, a senior economist with Bank of America in San Francisco.
Auto production, for example, fell in February as dealers used incentives to sell cars that had been packing their lots in a worrisome inventory buildup late last year. Some analysts interpreted the drop in auto production as a sign the economy was losing steam.
“I think the housing and production statistics today confirm what we have been saying--that things are very soft,” argued Irwin L. Kellner, chief economist with Manufacturers Hanover Trust Co. in New York and one of the declining number of economists predicting a recession for 1988.
Yet the same drop in auto production encouraged others who had worried that the inventory buildup threatened economic disruption. Signs of declining auto inventories “will set the stage for somewhat greater auto production in the second quarter of the year,” Penzer said.
While the stock market crash’s ultimate effect on the economy remains a mystery, Mellon Bank’s Robertson said it increasingly looks like a “cataclysmic event” that came and went with little trace of damage. “Looking back, it caused barely a ripple on the economy’s surface,” he maintained.
