Number of Signs Indicate Turnaround Under Way
Not long ago, the National Bureau of Economic Research, the official arbiter of the business cycle, determined that America’s ninth postwar recession got under way last August. If it ended last month, it would be 10 months long--no worse than six of its eight postwar predecessors, as far as length is concerned. It is milder than average in most other respects as well.
There are a growing number of signs that suggest that the worst may be over, and that our 10th postwar expansion may be close at hand.
As usual, there are some who would dispute the view that the end of Western civilization as we know it has once again been postponed. Among them are many in the business community.
You can’t blame many businessmen in view of their own dreary circumstances. Government figures show that new orders for durable goods topped out last autumn, and by April were running a hefty 12% below their peaks. In particular, new domestic car sales in April and May ran at the lowest rate in 8 1/2 years--when the economy was in the last recession. In addition, another key industry, construction, is languishing as well.
The building boom of the 1980s has combined with the downsizing of business staffing needs of the 1990s to produce a glut of vacant space. The office vacancy rate today is more than 17%, compared to only 4% 10 years ago.
To make matters worse, even where there might be an opportunity to develop a piece of property, financing is very difficult to come by, as lenders try to cope with the two-way squeeze caused by the Tax Reform Act of 1986 (which depressed real estate values) and tightened regulatory standards regarding bank capital ratios and the loan examination process (which has inhibited lending).
When consumers look around, they are not thrilled, either. While various surveys of people’s moods show a nice rise in confidence from January’s 16-year low, it is mostly due to rosier expectations for the future--not because of any sudden improvement in their current financial situation.
Years of trying to keep up with rising prices and higher taxes have depleted many families’ savings, causing them to go heavily into debt. The savings rate has fallen to one of its lowest levels in the postwar era, while people owe more, relative to their take-home pay, than they ever have before. It hasn’t helped matters that the value of the average family’s biggest asset--its home--has fallen significantly over the past three years.
On the other hand, the drop in home prices has also produced buying interest. Sales of both new and existing one-family homes bottomed out in January, seasonally adjusted, while housing starts are well above their lows.
This pick-up in housing activity should not be underestimated when it comes to helping the economy emerge from a recession. Sales of new houses, of course, will increase the demand for all kinds of materials that go into the construction and furnishing of a home.
The latest figures show that this may already be under way. Retail sales at general merchandisers have risen most months of this year, after falling sharply toward the end of 1990.
The nation’s purchasing managers already sniff improvement in the air. Their index covering the industrial side of the economy hit bottom in January, and has been rising over since.
Not surprisingly, output of the nation’s factories, mines and utilities rose in April after falling nonstop during the previous six months. Nevertheless, production schedules are being kept below sales, since inventories are still sliding.
The stock market senses that better times lie ahead. The decline in interest rates and the expectation that this will lead to better sales and earnings have sent stocks soaring.
The government’s index of leading economic indicators has climbed in the past three months, after falling nonstop during the previous six. If this index rises for another month or two, it would be an additional sign that the recession is over.
The expected upturn in aggregate economic activity should become visible on a quarterly basis starting in this year’s third quarter, with a modest rise in the real GNP. However, to many, it will be difficult to distinguish between recession and recovery for several reasons.
New jobs will not be readily available, since employers will not want to add to their staffs until they are sure the improvement in business is permanent. Also, learning from recent experience, many will try to keep their payrolls “lean and mean.”
New peaks in overall spending are not likely to be reached until well into 1992.
This suggests the need to keep a close watch on inventories and other costs of doing business, since weak demands will make it difficult for most companies to raise selling prices in order to boost profits.
The muted nature of this recovery contrasts with past rebounds, which have seen the real GNP jump by rates of nearly 7% during the first year.
