Economic Signs Raise Hopes of Steady Recovery

To the surprise of business executives, policy-makers and investors, the on-again, off-again U.S. economy has picked up steam once more, raising hopes of a sustained upturn in the coming months.

In the last few days, a flurry of reports has dramatized gains in a recovery that has surged and sputtered repeatedly for more than two years. Consumers are buying, businesses are investing and factories are chugging along, all energized by exceptionally low interest rates.

“Not only are we having a pickup, but it seems to be picking up at a quickening pace,” declared Robert G. Dederick, chief economist at the Northern Trust Co. in Chicago.

The sense of a shift has spread anxiety throughout the financial markets, driving down the value of both stocks and bonds due to the fear that a warmer economy will mean higher interest rates. In the past two days, the Dow Jones industrial average has dropped nearly 73 points.

Reports of boom-like spending by consumers on homes, as well as robust purchases of automobiles, have provided the most intriguing evidence of a changing climate.

In addition, manufacturing rallied in October, according to a recent survey of corporate purchasing managers. On Thursday, the government also reported gains in factory output and in worker productivity.

Put it all together and most analysts foresee a fast-moving economy at the moment. Although they expect growth to settle back into the moderate 3% range in 1994, the hope is that the economy’s erratic up-and-down pattern of recent years is finally coming to an end.

“We’re seeing a remarkable increase in consumer spending,” said Joseph A. Wahed, chief economist at Wells Fargo Bank in San Francisco. “Outside of California, people are not so uptight. It’s a broad-based recovery.”

The national upturn has favorable implications for California as well. Consumers all over the country buy the state’s goods and services, ranging from clothes to computers to compact disks.

But there are limits to the encouraging news: Most analysts say that ongoing problems will postpone California’s recovery for another year.

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And despite the U.S. economy’s rustlings, few foresee a sustained boom, even outside the Golden State. California-style problems of defense cuts and a costly surplus of under-used office buildings and shopping centers continue to sap growth in pockets of the East.

“The U.S. economy is improving,” maintained Sung Won Sohn, chief economist at Norwest Corp. in Minneapolis. “But it’s not going to turn into a boom.”

The Clinton Administration has relied heavily on low interest rates to stimulate the economy. But the payoff in jobs has been paltry compared to past upturns. The latest word on jobs--and the recovery’s strength--comes today, when the government releases its monthly report on unemployment.

The lack of job growth “has made this recovery seem invisible to so many people,” said Lynn Reaser, chief economist at First Interstate Bancorp in Los Angeles.

At the same time, low interest rates have brought the greatest hope of improvement.

The key, 30-year Treasury bond is hovering around 6.1%--a very low level in spite of a recent rise fueled by inflation fears brought on by renewed economic growth. A year ago, the Treasury bond rate was 7.5%.

Lower interest rates have made it cheaper to finance everything from refrigerators to office equipment to buildings, fueling a wide array of growth in related services and manufacturing.

Lower rates also have sparked a massive wave of refinancing, enabling households and businesses to repay old debts at lower rates. Beyond that, they have promoted a rush of home sales as people clamor to exploit low mortgage rates.

In the last three months, the rate of home purchases has exceeded the 1980s peak, a trend that ripples beneficially through the economy, heightening demand for carpets, appliances, draperies and a whole panoply of furnishings.

Sales of cars and light trucks also have been very brisk, with truck sales in late October reaching the fastest tempo in three years. Auto sales were up 10.5% over a year ago in late October, propelled by General Motors’ gain of nearly 13%.

Business executives also have scrambled to benefit from low borrowing rates, loading up on new information technology, telecommunications equipment and other modern machinery.

Equipment purchases, which are running at sharply higher levels than a year ago, hold both long-term and short-term, benefits: “It probably implies that productivity will grow as well, and that’s something that makes us richer in the future,” said Bruce Steinberg, an economist with Merrill Lynch in New York.

Various new gauges of the economy have detected an upturn in activity.

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U.S. factories received increased orders in September for the second straight month, the Commerce Department said Thursday. Separately, a Labor Department analysis found a sharp rise in worker productivity, a harbinger of continued low inflation.

Earlier this week, the Commerce Department reported that its chief forecasting tool--the index of leading economic indicators--rose 0.5% in September, propelled by gains in manufacturers’ orders for consumer goods, building permits, stock prices and other gauges of business.

On the consumer side, one hint of behavior--the level of credit card debt--increased at an annual rate of 5% in July and August, after barely budging in 1991 and 1992.

“I think we’ll have a better Christmas this year,” said First Interstate’s Reaser. “Consumers are somewhat more confident, and their willingness to use credit is an indication of that.”

But analysts foresee a limit to such confidence--and the likelihood that the economy’s current growth rate, perhaps in the range of 4%, will ease back to 3% next year. The key reason is that jobs and, therefore incomes, are not increasing at a pace that would support a sustained surge.

Job gains have averaged just 150,000 a month this year, half the pace of more robust recoveries. Continued cost-cutting by corporate employers makes a major revival of hiring unlikely in the near future.

And the public seems to know: Consumer confidence plunged in October, according to a survey by the Conference Board, a New York business research group. “The missing ingredient is job growth,” Merrill Lynch’s Steinberg said. “From the point of view of the average person, there’s still a lot of difficulties out there.”

The national recovery also remains a decidedly mixed experience, with California, New York and other regions of the Northeast lagging behind parts of the West, Midwest and Southeast.

“Business activity has been increasing at a slow to moderate pace recently, according to reports received in most Federal Reserve districts,” a Federal Reserve summary released Wednesday said.

The prospect of higher taxes, uncertain costs of health care reform and continued slumps overseas--which have hurt U.S. exporters--all remain vulnerabilities.

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These problems and others--notably the nation’s lingering debt burdens and continuing defense retrenchment--amount to a “speed limit,” restricting the pace of recovery, says Norwest’s Sohn.

Thus some wonder if the recovery is still stuck in a peculiar stop-and-go pattern, despite the upbeat statistics. Hopes have been raised before, particularly late last year, when growth approached a sizzling 6%.

In early 1993, growth almost vanished as military spending plunged and over-extended consumers cut back more than expected after a buying surge lasting several months. “The growth was so strong, it basically sucked the life out of early 1993,” Steinberg said. “The question mark now is whether the same thing will happen again.”