‘Short, Shallow’ Slump Seen by Many Experts
At a time of soaring oil prices, turmoil in federal budget policy and widespread financial jitters, it might seem that the U.S. economy is about to go off the cliff. In fact, the current downturn may prove surprisingly mild, many economists say.
“The slump should be short and shallow,” Jerry Jordan, chief economist at First Interstate Bancorp in Los Angeles, predicts.
There is growing agreement that a slump of some degree has arrived. Cautious consumers, troubled financial institutions and a weakening jobs picture are just a few of the signs. Since the onset of the Persian Gulf crisis, gauges of employment, industrial output, construction and retail sales all have portrayed an economy that is losing vitality.
“Something always causes a recession--they just don’t happen,” observed Norman E. Mains, chief economist with the Bateman Eichler, Hill Richards investment firm in Los Angeles. “In this case, the escalation of oil prices pushed us over the line.”
Mains is in the crowded camp of optimists: He predicts the slump will be “relatively short and moderate.”
Just how moderate is the sort of imponderable that economists debate endlessly. Certainly, the heavy debt burden now held by much of corporate America--owing to 1980s financial machinations--poses potential trouble. And a malaise has emerged in public expectations for the economy, recent surveys show. Thus, some foresee a more serious downturn in store.
Yet, at the apparent start of what is arguably the most anticipated recession in history, things could be worse. Remember the “misery index” of inflation and unemployment widely quoted in a past day of feverish price rises? Today it stands at 11.22; in the 1980 recession, it soared beyond 20.
Several factors may temper the misery of a slump this time around, according to those who look on the bright side.
Interest rates--although high enough to frustrate many executives--are not skyrocketing, as they have at the outset of recent downturns. The prime rate, on which banks base loans to favored customers, currently stands at 10%, half a point lower than it was in January. Early in the 1981-1982 recession, the prime galloped to 20.5%; in the 1980 slump, it hit 19.8%.
To the optimists, this suggests that the coming economic adjustment will be less traumatic than in some past recessions.
“The economy hasn’t fallen out of bed, by any means,” said Gary Schlossberg, an economist at Wells Fargo Bank in San Francisco. But he added cautiously: “If we’re not in a recession already, we’re awfully close.”
Another plus for the economy is the seemingly mundane matter of inventories, an element viewed as quite important by economists. In a classic recession, inventories in stores and factories pile up, saddling businesses with unsold products and triggering a chain reaction of layoffs.
This time, however, there is at least some encouraging news: Although retail inventories have risen, factory inventories are at their lowest level in years, having dropped throughout the 1980s.
“When you weigh all the evidence, I think the odds are still in favor of what I would call a fairly mild setback,” said Norman Robertson, chief economist at Mellon Bank in Pittsburgh.
In serious slumps of the past, companies often have had to impose harsh layoffs as conditions grew worse. Optimists say cuts and layoffs may be less severe this time because so many firms trimmed costs in the 1980s in an effort to heighten competitiveness. Industrial America may also be aided by the low level of the dollar, which gives a price advantage to U.S. products.
“Even the auto makers and steelmakers seem fairly well prepared for this recession,” said Paul Getman, an economist with Regional Financial Associates, a consulting firm in West Chester, Pa.
If the optimistic view is correct, even consumer debt burdens may be more benign than expected. That is because, much more than in the past, consumer loans are linked to the rate of inflation. About 30% of all home mortgages, for example, now have adjustable rates, Getman calculated. The monthly payments for such loans would gradually decline as interest rates fell in a recession.
Is there something wrong with this picture? Isn’t there a chance that the recession will be long and painful? The sunny scenarios could prove to be ill-founded, to be sure. The price of oil, the outcome of the Persian Gulf crisis and other variables all could influence the economy in ways that are impossible to predict.
“Most economists are saying this is going to be a mild recession,” declared Sandra Shaber, an economist with the Futures Group, Washington consultants. “But, as they say--in our wonderful jargon--all the risks are on the downside.”
Parts of the economy are in serious trouble right now. Construction, for example, is in its worst shape in years. Real estate values have fallen sharply in the Northeast and parts of the West. Regionally, New England and the Middle Atlantic are in the grips of a full-blown downturn.
A major problem is whether debt-saddled U.S. corporations can survive a business decline without plunging into bankruptcy and throwing their employees out of work. Debt has become a chronic burden for many firms. Today, about 35% of overall corporate cash flow goes to interest payments--compared to just 18% in 1985, according to the Commerce Department.
As conditions worsen, the debt burden will only get harder to bear. “The highly leveraged nature of the economy means that the negative consequences (of a recession) are that much greater,” warned Raymond Dalio, president of Bridgewater Group, a money-management firm in Wilton, Conn.
Another notable minus is the troubled state of the financial industry. Increasingly, banks and other lenders are being haunted by commercial real estate loans that are delinquent or in default.
The problems are most obvious in the Northeast--Chase Manhattan Corp. just announced a $623-million third-quarter loss--but they may be spreading westward. This week, Security Pacific Corp., Citicorp and Great Western Financial reported declines in third-quarter earnings.
“The risk is that the problems of the banking sector and real estate sector will start to feed on each other,” Robertson of Mellon Bank warned. Nonetheless, he foresees “a pretty shallow, short-lived recession.”
And, although today’s interest rates may look better than those of the late 1970s, many investors complain that the Federal Reserve Board is moving too slowly to ease them in a faltering economy. Fed Chairman Alan Greenspan has said that he would let rates fall if Congress and the White House settle on a credible plan to reduce the U.S. budget deficit.
Getman, who maintains that the recession could be mild, said that the outlook will darken if interest rates don’t start to decline: “If short-term rates don’t fall quickly, you’re going to have one hell of a recession,” he said.
To further complicate matters, some question whether the gains from cutting the deficit will be offset by damage from the higher taxes and reduced federal spending that would be part of a spending accord.
“The budget accord, needed as it is, is out of step with the economic climate,” Mains of Bateman Eichler said.
Yet, for all the bad news, some experts still say the economy has more life in it than is commonly recognized. “I’m still persuaded that the economy is going to skate by--barely,” said Frederick W. Thurm, an economist with Fuji Securities in Chicago.
