Troubling Signs Raise Possibility of ’96 Recession
Like a thundercloud over a picnic, the possibility of a recession is looming over the nation’s economic future for the first time since the early 1990s.
While Washington remains stalled by budget gridlock, a growing number of economists and business analysts are worried that the economic slowdown could deteriorate into a full-blown downturn this year or next.
Such arguments are bolstered by the poor Christmas retail season, wary consumers with maxed-out credit cards, past Federal Reserve interest-rate hikes and the bearish reaction of financial markets to Washington’s inability to resolve its budget mess.
A downturn in the nation’s economic fortunes would mean trouble for California’s emerging recovery, since about a third of the state’s economic activity is directly linked to the rest of the nation.
So far, the betting is still that a recession can be avoided in 1996. Most economists are hoping that earlier forecasts for positive, though slowing, growth in the nation’s gross domestic product will pan out.
“There are some signs out there now of fairly classic slowdown in the U.S. economy,” said Ted Gibson, chief economist with the California Department of Finance.
The conventional wisdom is that the nation’s economy will grow around 2% to 2.5% in 1996, compared to around 3.3% for 1995 and 4.1% in 1994.
But part of the problem is that few economists foresee recessions before they hit. For now, a number of forecasters are hedging their outlooks, at least for the start of 1996, with some predicting a first-quarter decline in national output. If this happens, they hope prompt action by the Federal Reserve to lower interest rates will lead to a modest economic rebound.
A variety of factors, however, could tip the nation back into a real recession (defined as at least two consecutive quarters of falling gross domestic product), particularly a dramatic pullback by consumers.
“I would say the biggest problem in the economy right now is the level of consumer debt,” said Gary Shoesmith, director of the Center for Economic and Banking Studies at Wake Forest University’s Babcock Graduate School of Management in Winston-Salem, N.C.
And much hinges on the outcome of the current budget talks in Washington. A delay in resolving the budget could further spook financial markets and send interest rates up, which would hurt sales of durable goods and the housing market.
On Sunday, Rep. John R. Kasich (R-Ohio), chairman of the House Budget Committee, sent a conciliatory signal that the GOP wants to avoid another government shutdown and is prepared to let the government take on new debt to avoid a possible cash crisis next month.
But however the budget impasse is resolved, it’s likely to include cuts in benefits or programs that could affect the economy.
Consumers may “finally be coming to grips with what resolving the budget deficit will mean,” said University of Chicago economist John Huizinga, the author of one of the more pessimistic forecasts for the nation’s economy. He forecasts growth of only 0.8% in 1996.
“Either they’re going to be losing their jobs because of some cutback in the defense industry or some other place where government spending is cut, or they’re going to lose benefits, like Medicare,” he said. “So I think part of the pessimism is related to their understanding that reducing the budget deficit is not going to be painless.”
As a result, Huizinga bases his gloomy forecast on a theory that consumers pull back spending when they expect their real incomes to fall in the near future.
The Conference Board’s widely watched consumer confidence measure dipped slightly in December, after increasing the month before. “American consumers are less positive about current economic conditions than they were in November,” the board said.
California economists last week downplayed the threat of a national recession as Gov. Pete Wilson unveiled his 1996-97 budget that among other things projects a $300-million state surplus.
“If it’s just a slowdown to 1% or so, which I anticipate . . . in the first half of ‘96, I don’t think it will materially affect our recovery,” said Gibson of the California Department of Finance. “But if it develops into something more, which I don’t expect, yes, California would be affected.”
The state’s economy has emerged from its punishing recession with renewed vigor and a mix of industries that is expected to fuel growth outpacing the rest of the nation: computers, motion pictures and other entertainment, and international trade, Gibson said.
Even aerospace and defense, which continue to bleed jobs, are poised for a comeback of sorts, with new contracts for commercial aircraft and hefty orders for new military planes from the federal government.
Nationally, a dip in the nation’s economy would hurt the reelection prospects for President Clinton, whose defeat of George Bush in 1992 was built on a simple strategy: “It’s the economy, stupid.”
Some troubling signs:
* Same-store retail sales rose only 1.7% in December, the all important Christmas shopping season, which was the lowest increase in 10 years.
* Automobile sales in 1995 were unexpectedly flat, and are expected to remain stagnant through 1996. Auto makers have been trimming production. Economists for General Motors Corp. predict vehicle sales to reach 15.3 million units in ‘96, compared to 15.1 million in ’95.
* The National Assn. of Purchasing Management said its widely watched Purchasing Managers’ Index was up slightly in December, at 47.3%, but remained below 50%, indicating that manufacturing activity declined.
* The National Assn. of Realtors expects sales of existing homes to remain flat in 1996 at around 3.75 million units.
“The wild card is the budget negotiations,” said John Tuccillo, the association’s chief economist. “The driving force in the entire housing industry is interest rates, and if the budget talks collapse . . . we’ll see interest rates climb, and the housing sector will have a worse year than we expect.”
Still, the economic signals overall are mixed. Inflation remains under control, credit is available and other surveys show that consumer confidence remains high.
Over the last two years, the University of Michigan’s index of consumer sentiment showed confidence has varied only slightly from its favorable levels.
“There won’t be a recession because we don’t deserve one,” said Larry J. Kimbell, director of the UCLA Anderson Business Forecast. “In the past four recessions . . . the recession was preceded by an acceleration of inflation ranging from 4% to 7%. . . . Clearly, we have nothing like that now.”
International trade could be a key factor in 1996. UCLA forecasters expect real exports to grow $94 billion by 1998, outpacing imports by $54 billion. “Net exports, instead of holding back real GDP growth, will make the largest contribution,” the forecasters argued in their December report.
UCLA bases its forecast in part on the trade advantages of the relatively weak dollar, expectations that real GDP in the rest of the world will grow 3.1% in 1998 and the nation’s growing competitiveness in providing services worldwide.
But UCLA recognizes that, in 1995 at least, net exports were a drag on the economy. “If international trade does not switch from a declining component to a rising contributor, this forecast is in trouble,” forecasters wrote.
Compounding the uncertainty for now is the lack of federal government economic numbers for the fourth quarter, which are being delayed until late January by the government shutdown and the blizzard back East.
Which leaves forecasters in a quandary. “There are only two kinds of economists,” Wake Forest’s Shoesmith said. “Those that can’t forecast recessions and those that don’t know they can’t.
“I was sharing the platform with two other economists in August of 1990,” he added. “The 1990-’91 recession began in July. We were already in it, and the three of us were speculating whether one would happen.”
