Best Outlook: Mild Recovery in 2nd Half of ’91

Now that the White House acknowledges that the U.S. economy has slipped into recession, the question arises: How severe and long-lasting will it be?

Many Administration and private economists still optimistically predict that the slump will be no worse than past episodes--and possibly milder--with a modest recovery in employment and business activity in the second half of the year.

They point to strong U.S. export growth and low inventories of goods, reducing the risk of factory layoffs, as evidence that the slump will be relatively mild.

But more and more economic data depicts a less benign picture. By all accounts, the economy weakened sharply in the last three months of 1990. And, on Wednesday, there were new reports of weakness in manufacturing, construction and auto sales, as well as declining confidence on the part of business leaders.

A rogue’s gallery of uncertainties could worsen the outlook, including bank problems and the Persian Gulf crisis.

As a result, more economists are allowing for the possibility that their optimistic forecasts may miss the mark.

“Most of the bad news appears to be happening in a short space of time,” said Joseph Wahed, chief economist at Wells Fargo Bank in San Francisco, who foresees a “very hesitant improvement” after the summer.

“Everybody agrees the economy declined substantially in the fourth quarter of 1990,” said Mickey D. Levy, chief economist at CRT Government Securities in New York. “The issue is: Does it continue to decline rapidly this year?”

A recession is generally described as six straight months of dwindling economic activity. Since World War II, such slumps have lasted about 11 months on average.

Just a few months ago, many economists argued that the nation could avoid a recession. But a barrage of negative statistics on employment, retail sales and manufacturing in recent weeks has convinced virtually all forecasters that a recession has descended.

Those who contend that the slump will ease within several months point to certain strengths that may serve as life rafts for the listing economy.

Exports, for example, now make up almost 15% of overall economic activity, up from 10.8% in 1986. The dollar’s low value on foreign exchange markets may provide a further boost, because it gives U.S. manufacturers a pricing advantage over their foreign rivals.

“That’s a tremendous opportunity that just is going to keep growing,” said James F. Smith, an economist at the University of North Carolina at Chapel Hill.

In addition, economists applaud the vigilance of many companies against piling up excessive unsold inventories this year. Failure to control inventories has led to factory layoffs in the past and aggravated recessions in the 1970s.

The danger of excessive inventories has further been reduced this time by the sluggish growth that has affected much of the U.S. economy for more than a year, Levy said.

In a new survey of 40 economists by the Wall Street Journal, most said the current recession began in the second half of 1990 and that it would last through the first half of this year. On average, those surveyed said the U.S. economy would decline by 0.9% in the first half of the year and grow by a sluggish 1.7% in the second half.

But such forecasts may seriously understate the perils faced by the economy, and the likely severity of the recession, some say. Uncertainty in the Middle East has sparked an extraordinary plunge in confidence by consumers--whose purchases help fuel the economy--and by business executives, whose investment decisions help drive it ahead.

There is also an array of debt-related problems that threaten to intensify today’s slump. Many corporations, sinking under their debt burdens at a time of weak revenues, are close to bankruptcy. Many consumers are more tapped out than they were in slumps of the past. Recent tax increases by the federal and state governments are an added burden on the public.

And banks, whose own finances are shaky, are reluctant to provide credit, a squeeze that further inhibits economic growth.

“We just find it whistling past the graveyard to believe the nation will be out of this thing quickly,” said Micheal J. Drury, a senior economist with the Boston Company Economic Advisers Inc.

The newest signs Wednesday were not encouraging. The widely watched purchasing managers’ index dropped for the fifth consecutive month, pointing to continued weakness in the manufacturing economy. The index has sunk to its lowest level since May, 1982, suggesting an overall economic decline, the National Assn. of Purchasing Management said in its report.

The association takes monthly surveys in eight areas: production, new orders, imports, new export orders, supplier deliveries, inventories, employment and prices. The purchasing managers index is a composite of those surveys.

An index reading below 50% indicates that the nation’s manufacturing economy generally is in decline.

Also Wednesday, the Commerce Department announced that construction spending fell 0.6% in November to an annual rate of $422 billion, the lowest since October, 1988. In addition, a survey of more than 500 corporate chief executives found a pervasive gloom about the economy, with more than 60% expecting conditions to worsen in the first six months of this year.

“A large majority of business leaders in virtually all industries say that conditions have deteriorated in their own sectors,” said Jason D. Bram, an economist at the Conference Board, a business information group in New York that conducted the survey. “Least confident about both current conditions and near-term prospects are banking and financial executives.”

Clearly, consumers are worried as well. The auto industry Wednesday reported a broad-based 19% decline in mid-December sales of U.S.-produced cars and trucks compared with the same weak period in 1989. Americans bought an average of 20,487 North American-built cars and trucks a day during the Dec. 11-20 period of 1990, compared with an average daily rate of 25,795 during the same time in 1989.

Led by Chrysler Corp.’s 29.1% decline, the Big Three U.S. auto makers posted a combined 20.6% decrease in total vehicle sales for the period. Car sales slipped 18.9% and truck sales fell 22.8%

“You’ve got a loss in confidence, a pullback by consumers, a dislocation in 400,000 families by moving these men and women to the Middle East, a whole host of negative features at play,” said Robert T. Falconer, senior vice president and economist at Aubrey G. Lanston & Co., a New York securities firm.

PURCHASING MANAGERS’ INDEX

The purchasing managers’ index tracks overall business activity at 300 industrial companies. December 1990: 40.4% Source: National Association of Purchasing Management