Recession Here Already, Many Analysts Agree


Like a boat taking on water, the listless U.S. economy had sunk into recession even before the current oil crisis began, a growing number of analysts now say.

"I think we slipped into a recession in August, regardless of the Iraqi situation," said Allen Sinai, chief economist with the Boston Co., a consulting firm.

Although the Persian Gulf crisis is expected to worsen matters, the gloomy opinion is based on other problems: Rising unemployment, lackluster orders for factory goods, sluggish sales to consumers and malaise in the construction industry all seem to underscore a sinking economy.

In addition, many builders and other businesses have had trouble getting loans, creating a "credit crunch" that further weighs down growth.

"It's reasonably clear to me that the economy is in a recession right now," said Sung Won Sohn, chief economist at Norwest Corp., a large financial services firm in Minneapolis.

The oil shock, he continued, makes things worse by cutting into people's buying power at a time when rising unemployment already has started to undermine the economy. "I could punch you, and if you were a strong boxer it wouldn't matter," Sohn said. "But if you were fragile and ill it might knock you down."

Unemployment in July rose to 5.5%--the highest level in two years--from a 5.2% level in June. The Persian Gulf crisis also complicates efforts to solve the $169-billion U.S. budget deficit. Energy taxes, for instance, were a key proposal in congressional efforts to reach a compromise deficit-cutting plan. But such measures have become more controversial since the recent leap in oil prices.

Failing to reduce the deficit would be yet another minus for the economy, analysts say. That is because investors from Japan and other countries help finance the deficit by purchasing U.S. Treasury bonds--but they will do so only if U.S. interest rates remain relatively high. "The budget summit has been totally derailed by this event," argued Donald H. Straszheim, chief economist at the Merrill Lynch investment firm in New York.

U.S. exports remain one of the economy's few buoyant features, but the oil shock threatens that asset, as well. As Japan, South Korea, Taiwan and other U.S. trading partners spend more on energy, they have less left over to buy American-made products. "That says our export performance is likely to deteriorate," Straszheim said.

Straszheim and many economists say the United States may narrowly escape a recession, and instead settle into a time of near-stagnation. In common terms, a recession is a period of at least six months in which economic activity actually shrinks on a national basis.

What is unusual, however, is the growing number of well-known economists from different parts of the country who have concluded that the slump is now here.

In a recession, people become insecure about spending their money, harming retailers and manufacturers. Hard-pressed employers lay off workers, as hard times ripple further into the economy. Experts often disagree on when a slump starts and ends. The official decision is made afterward by the National Bureau of Economic Research, a nonprofit organization in Cambridge, Mass.

"You never know it till it's right on top of you," said A. Gary Shilling, a New York economist who also believes the United States is in a recession.

Others say a recession is starting now. Just last week, the U.S. Chamber of Commerce predicted economic growth would "grind to a virtual standstill" this fall. A recovery is not likely before the second half of 1991, the chamber said.

"The handwriting is on the wall--the economy is sinking fast," Richard W. Rahn, the chamber's chief economist and vice president said in an interview. "Unfortunately, we believe we are entering a recession."

The U.S. economy grew at a sluggish 1.2% annual rate between April and June, slowing from a lackluster 1.9% rate between January and March.

Rahn chided the Federal Reserve Board for awkward attempts to "fine-tune" the U.S. economy and for keeping interest rates too high. He further complained that Congress and the White House have failed to rein in spending. "The reason we're entering a recession is not because of the oil shock," he said.

Indeed, a variety of reasons are cited for the possible finale of an economic recovery that is now in its eighth year, the longest peacetime expansion of the century.

Some observers chalk it up to old age, arguing that the economy, like a person, can ultimately fall victim to a combination of infirmities.

The U.S. economy has reached a point of "fatigue," said Sinai, pointing to the pile-up of private debt and a slowdown in big purchases by households that had satisfied some of their consumer cravings in the 1980s. A protracted rise in energy costs, he added, "would intensify the downturn and prolong it."

Others trace the roots of the slump all the way back to the stock market crash of October, 1987. Banks and investment brokers began contracting at that time, laying off workers and sparking a decline in real estate values in New York, recalled Irwin L. Kellner, chief economist at Manufacturers Hanover.

Since then, the decline in real estate values has spread through much of the nation, undermining homeowners' sense of affluence and making them reluctant to spend on other things, thereby slowing down the economy.

Contrary to the go-go 1980s, when widespread lending helped grease the economic machine, lenders have become aloof, depriving businesses and entrepreneurs of needed financing.

A July survey by the U.S. Chamber of Commerce found that 21.5% of businesses had experienced difficulties getting needed credit in recent months, including firms in construction, communications and transportation. Troubles in the thrift industry and the slow national economy were key factors, Rahn said.

In late June, the Commerce Department reported unusually sluggish economic growth in recent months, and an actual decline in final sales, a gauge of buying by consumers, business and government that has not fallen in eight years. And last week, a Federal Reserve Board spot check of business activity in July found evidence of weaker growth in parts of the Northeast, Middle Atlantic and Midwest.

Another warning sign: A dozen states have raised taxes or fees for the 1991 fiscal year to get needed income, and several others have responded with spending cuts, according to the National Assn. of State Budget Officers in Washington.

Put it altogether and some analysts say the pattern is painfully clear: "The economy can no longer dodge the bullet, and now we're in our ninth post-war recession," declares Kellner.

Even those who don't believe the nation is in a recession foresee a dismal U.S. economic performance in the coming months. "The economy is going to stay flat as a pancake, at least until the end of the year and possibly into next year," said C. Frazier Evans, chief economist with the Colonial Group of Mutual Funds in Boston.

But he added: "Most of the people I talk to think we're already in a recession."

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