NEWS ANALYSIS : Is U.S. Economy Losing Steam at Midyear Point?
The U.S. economy, which streaked into 1995 with the balance and power of a marathon runner, has performed so feebly of late that experts increasingly wonder if a recession could be starting--a view that would have seemed outlandish just a few weeks ago.
“If you asked ‘What does a recession look like?’ and you took a look at what happened in May, you’d conclude that that is what a recession looks like,” said Donald Ratajczak, director of economic forecasting at Georgia State University.
Nevertheless, the outlook may be better than the raft of disquieting news on jobs, factories, housing, auto sales, wary consumers and piled-up inventories suggests, many economists maintain.
Few forecasters are writing obituaries for the 4-year-old economic upturn. Rather, most still cling to the somewhat shaken view that the recovery will pick itself up and regain some of its stride this year.
“Six months ago there was almost no risk of a recession,” said Theodore H. Tung, senior vice president and chief economist at National City Corp., a Cleveland-based bank holding company. “Now we see that it definitely has increased--but there’s still a good possibility a recession can be avoided.”
The anxiety has been caused by stronger-than-expected gusts that have hit the economy on its way to a “soft landing” of reliable, modest growth with low inflation.
Fallout from last year’s hikes in interest rates, a new wariness among consumers about buying houses, cars and other costly items and a disruptive pileup of unsold products in the nation’s warehouses have interacted to slash growth from the torrid 5.1% pace of late last year.
The pileup of materials, aggravated by executives who had counted on a booming 1995, is at the epicenter of concerns. Already, businesses have cut back on orders for a variety of products, factories have ratcheted down and, in May, 101,000 payroll jobs went poof.
Many firms keep a tighter rein on inventories than they used to, but today’s more sophisticated controls have not always prevented the disruptive buildup. The fear is that more job cuts could fuel an economic chain-reaction as a shocked public reduces spending further, exacerbating the pileup of unsold products and leading to further layoffs.
The production cutbacks have led to “a shedding of jobs, with companies in today’s economy treating workers almost like goods on the shelf,” said Allen Sinai, chief economist at Lehman Bros. investment firm in New York.
A Times Poll earlier this month found that 53% of respondents now say they believe that the nation is in a recession, up from 44% in January. “Even if we miss having a recession, it’s going to be a bumpy ride,” said economist David A. Levy of the Jerome Levy Economics Institute in New York, who said he believes that there is a 50% chance that a bona fide slump began in April.
(A recession is commonly defined as two consecutive quarters--six months--of declining economic growth.)
In one warning sign, railroad executives have noted a marked decline in the number of freight cars carrying lumber to build houses in just the past few weeks. The new caution of consumers pops out of statistics on appliance shipments, for example, with declines in April for washing machines, clothes dryers, refrigerators and dishwashers.
Yet the picture is murky, with plentiful evidence that the economy holds a reservoir of strength.
The brunt of the slowdown has been borne by industries whose fates are most tied to interest rates, such as housing and cars. Even with an apparent dip in appliance sales, however, 1995 could still turn out to be “the second best year in history,” said Jim Powell, spokesman for Maytag Corp. in Newton, Iowa.
Even as Ford and Chrysler have scaled back their ambitious production plans for the summer, a sunroof maker in the Detroit suburb of Rochester Hills anticipates sales growth of 15% to 20% this year, aided by contracts with Ford, General Motors, Toyota and other auto makers.
“Everybody that we talk to, the feeling is still upbeat,” said M. Brett Healy, director of sales and marketing at Webasto Sunroofs.
Clearly, though, Americans have toned down their spending from the more hectic pace seen earlier in the recovery, a trend that economists are watching closely. Retail sales have fallen for three of the last five months, a drop most noticeable in autos and other big-ticket items.
The explanation for consumers’ changing behavior remains a partial mystery.
Certainly, it’s no surprise that many households could be taking a breather from major purchases in the fifth year of a recovery. In economists’ parlance, much of the “pent-up demand” for big-ticket items may be satisfied for now.
Interest rates, meanwhile, which rose as much as three percentage points last year, have added hundreds or even thousands of dollars to the price tag of items bought on credit, leaving households with heavier debts.
By early this year, debt payments had climbed to more than 16% of after-tax income, according to Levy. While lower than the 18% peak of 1989, debt loads may have reached the point where they are inhibiting many households from buying things, some analysts theorize.
Yet for all that, few experts say that consumers are engaged in a long-lasting retreat or that the bell is tolling for the current recovery. A survey of 52 economists earlier this month found that most still foresee solid growth for the economy this year, with an average forecast of 3.1%, a relatively high level. Even if forecasts are being revised downward in light of recent news, the question still leaps out: Why are the expectations so benign?
For one thing, the negative forces pounding the economy are widely seen as temporary and less than overwhelming. The pileup of inventories, for instance, is expected to fade this year. Already, long-term interest rates have slipped, providing new hopes for the housing industry.
A national index of mortgage applications rose 9.2% earlier this month, the Mortgage Bankers Assn. reported. Rates for 30-year fixed-rate mortgages, which exceeded 9% in December, now hover around 7.5%.
Disposable income continues to creep upward, fueled by this year’s stock market rally. Beyond that, the upturn may have something of an insurance policy: The Federal Reserve is widely expected to lower short-term interest rates, perhaps this summer, if signs of weakness continue.
Certainly, each weak statistic adds pressure on the Fed to lower interest rates. For their own part, Fed officials are now grappling with the mixed signals from consumers and businesses. Some still wonder if lower rates would provide more caffeine than the economy really needs, stimulating a new round of inflation.
“There is abundant evidence of a slowdown, but there is not evidence a recession is on the horizon,” Fed Vice Chairman Alan Blinder told a Minnesota audience recently. The economy’s sluggishness will last for two or three quarters and then be followed “by something close to normal growth,” said Blinder, who is considered a key pro-growth voice at the Fed.
Optimists can point to inflation and unemployment. Inflation is running at a moderate 3% and shows few signs of heating up, and the 5.7% national jobless rate is still considered low.
U.S. manufacturers, meanwhile, have become more competitive in the global marketplace, raising expectations for export gains this year, which could narrow the nation’s trade deficit.
As for consumers, confidence in the economy remains at healthy levels despite hints of slippage.
The University of Michigan said Friday that its preliminary consumer sentiment index rose to 92.3 in June, up from 89.9 in May, a gain that surprised many analysts. The May survey by the Conference Board, a business research group in New York, detected a less upbeat mood but found that the public still expects improved business conditions later this year, by a margin of 2 to 1.
