NEWS ANALYSIS : Prospects for Rare, Triple-Dip Recession Seen
Just when a wary American public was regaining faith in the struggling U.S. economy, bad news from the labor market has sparked a numbingly familiar question: Is another downturn on the way?
Dramatic new cuts in interest rates, announced Thursday by the Federal Reserve Board, may be sufficient to keep the leaky recovery afloat, as they prompt added borrowing and spending by consumers and business executives. But the danger of a rare, triple-dip recession has increased, economists said, in light of chronic problems that are plaguing the economy and the inability of interest rates to cure them.
“You’ve got to say it’s going to help,” declared Joseph A. Wahed, chief economist at Wells Fargo Bank, of the interest-rate cut. “But by itself, it’s not the magical solution.”
Another analyst, pointing to signs of economic slippage, said the odds of a new slump have risen to 50%, and he lamented that the Fed action did not come sooner. “I’d put it right up there in the too-little, too-late hall of fame,” said Edward E. Yardeni, chief economist at the C. J. Lawrence investment firm in New York.
Lower interest rates typically provide a boost to business by making it cheaper for people to borrow money and, therefore, pay for big purchases, from homes to sofas to factory machinery. Mortgage rates reportedly began to edge down Thursday as soon as word spread of the new cuts.
In addition, people often choose to refinance their existing debts at lower rates. That frees up household money to buy other things--purchases, which in effect add grease to a slow, clunky economy.
But economists were skeptical Thursday that lower interest rates alone would be enough to transform today’s precarious recovery into something much more solid and long-lasting. A host of ailments from the 1980s still linger, including large levels of debt in households and government, a surplus of commercial real estate and weakened financial institutions.
Lower rates actually backfire for some people, particularly retirees, who rely on interest income through their investments. Such payments have skidded sharply from the past, as rates have fallen. On top of all that, Thursday’s Labor Department report--which graphically portrayed a sputtering jobs situation--zinged raw nerves throughout the work force, not the sort of thing that inspires austere consumers to jump out on a limb of new debt.
“I think the whole culture of the country has changed from ‘borrow and buy’ to ‘pay off your debts and save,’ if you have the money to save,” Yardeni said.
The new statistics, which showed the unemployment rate rocketing to 7.8% in June--the highest level in more than eight years--raise basic questions about the recovery itself, which seems to have followed a bewildering, on-again, off-again path.
Economists agree that a downturn which officially began in mid-1990 shifted upward in the spring of 1991, as business activity rallied, but then stumbled later in the year. Many experts describe that second, sluggish episode--which ended in early 1992--as the recession’s double dip. Economic growth then picked up until just recently, and almost all forecasters had predicted that the modest national recovery would gain strength later this year.
In the last several weeks, however, weakness in hiring, retail sales, factory orders, export growth and home sales all seem to signal the danger of yet a third downhill slide for the economy--a so-called triple dip.
“I’m baffled,” said Lyle E. Gramley of the Mortgage Bankers Assn., who is a former governor on the Federal Reserve Board, after the gloomy jobs report came out Thursday. But he added: “I’m not prepared to jump to hasty conclusions that the economy is going down the tube.”
The lower rates are expected to help consumers who have home equity loans, fixed-rate or adjustable-rate mortgages, as well as credit cards that are linked to movements of the prime rate. Banks quickly followed the Fed on Thursday in cutting their prime rate, a benchmark for many business and consumer loans.
The Federal Home Loan Mortgage Corp. said the average rate on standard 30-year, fixed-rate mortgages dropped to 8.29% this week.
“It’s clear that we haven’t had a (mortgage) interest rate this low--persisting for any period of time--since the early 1970s.”
The 3% discount rate, which the Federal Reserve charges to member banks, has not been so low since July, 1963.
Recent history suggests, however, that the overall effect on the economy may be less than spectacular. Thursday’s action was the seventh time the Fed has lowered the discount rate since the recession began, for example, and economic growth has remained far lower than average for post-World War II recoveries.
With that track record in mind, some economists wished that the federal government could do more, such as spend large amounts of money to create new jobs. But the federal budget deficit, zooming toward $400 billion, precludes any large antidotes on the “fiscal” side, leaving little besides interest rates or monetary policy in the government’s anti-recession arsenal.
“You can’t go to war with only half the army fighting. Yet that’s what we’ve been doing for two years,” said Wells Fargo’s Wahed, who estimates the chance of a triple dip in the 20% to 30% range.
The interest-rate weapon may have little effect on other economic forces, such as an aggressive restructuring that has spread throughout U.S. industry, placing many thousands of jobs in jeopardy and weighing down the confidence of consumers.
To the chagrin of American workers, for example, employers have been cutting jobs and limiting hiring in response to overseas competition, deregulation at home and other forces that are divorced from the ups and downs of the business cycle.
Moreover, some experts believe that debt-saddled households will be loath to borrow further in the uncertain economic climate.
In April, for example, consumer installment credit debt fell by an unusually large $3.8 billion, as Americans sought to pay off some of their debt burdens. There also have been signs of an upturn in personal savings this year, reversing the free-spending trend of the 1980s.
