Why Recession Probably Isn’t in the Cards

Straight answers are wanted: Is the economy heading into recession? Or will it have a soft landing after seven years of expansion? Put another way, will the holidays be bleak and the new year cheerless?

None of those things. The most accurate assessment to make now is that the economy is ticking along, slower than it has in recent years, but faster than many suspect.

The employment figures, one of the most accurate measures of economic activity, tell an optimistic story. In October, the economy added 233,000 jobs--which is a fair monthly total. In a typical month of slow growth, the economy adds about 100,000 jobs--and in boom times, it adds up to 400,000.

So jobs increased to 118 million, but unemployment, at 6.5 million or 5.3% of the work force, didn’t. And that may be understating things, for the Bureau of Labor Statistics also reported that 7.2 million people, 5.8% of the work force, now hold more than one job--indicating that the economy has lots of work available.

And it will continue to make jobs, according to Manpower Inc.’s quarterly survey of employers’ intentions. More than a quarter of the nation’s employers intend to hire more people in the next two months, and many are hiring and training people now with an eye to staff requirements in the 1990s.

Indeed, with all that work around, it’s no wonder Main Street is less worried than Wall Street. The University of Michigan’s consumer survey--which has been asking people about their financial prospects since 1946--shows consumers highly confident right now. Low readings in the Michigan survey have occurred in times of high unemployment or high inflation--the lowest ever was in May, 1980--and apparently Americans aren’t concerned about either at the moment.

So clearly, the economy is not heading into recession. For that matter, “soft landing” is a misleading term also. Because the economy isn’t landing, says economist David Levine of the Sanford C. Bernstein research firm. It is in a slow cycle, and “will re-accelerate in the first quarter of 1990.”

Why will that happen? Because the Federal Reserve will ease up on interest rates--as it showed signs of doing on Tuesday with a dip in a key rate that it charges the nation’s banks.

But wait a minute, you say. Wasn’t it only Monday that the stock market fell in fear that higher job levels would persuade the Fed to keep interest rates up to curb inflation? Why then does the Fed appear to easing? What has changed?

The economy has changed. To understand what’s happening these days, you must put the U.S. economy in a world context, says Walter Joelson, chief economist of General Electric. World trade has slowed temporarily, he explains, and that has resulted in excess supply for many products worldwide. That has led to factories working at a reduced rate of capacity and lower industrial prices in the United States--thus lessening fear of inflation.

Yet industrial spending on new equipment and upgrading of manufacturing facilities has continued even while business was slowing. In the past, cutbacks in plant operations would spread quickly, causing slowdowns and unemployment. “But in the world economy, the competitive pressure never lets up,” says Donald Ratajczak, head of economics at Georgia State University. “So U.S. manufacturers have been spending $18 billion this year on information systems to make their factories run better.

“U.S. industry is no longer a leader in many technologies, and we don’t have cheap labor,” observes Ratajczak, “So it has to keep spending to stay competitive.”

The simple fact is that foreign trade--exports plus imports--now accounts for more than 15% of the total U.S. economy, and more than half of the manufacturing economy. That’s why exports--up 10% this year after growing 25% in recent years--have become a driving force in the economy and why spending on industrial equipment will be one of the big boosters as that economy expands next year and in the 1990s. “Spending in the commercial sector, to build stores, will be weak--but spending for capital equipment and electric power capacity will be strong,” predicts GE’s Joelson.

All of which is impressively hopeful. But are there no shadows in the picture? Sure there are: the government deficit, which raises U.S. industry’s cost of capital; the overhang of corporate and consumer debt. There are problems enough to worry about.

But right now the statistics on employment and capital spending say recession is not among them.