Recession Casts Shadow Over US Economy
Key indicators show unemployment climbing, federal deficit for the new fiscal year rising
THE drumbeat of bad news is thumping loudly over the United States economy. On Friday, the Bureau of Labor Statistics reported that unemployment had climbed two-tenths of a point to 5.9 percent in November. The economy lost 267,000 jobs that month on top of 187,000 in October.
The previous day, the Congressional Budget Office predicted that the deficit of $220 billion in the fiscal year that ended Sept. 30 would rise to at least $253 billion in the current fiscal year, 1991. And most large US retailers reported serious drops in November sales compared to November 1989. (Gasoline prices are expected to fall slightly. Story, Page 4.)
Even before this news, a survey by the Federal Reserve System noted: ``Retail sales, adjusted for inflation, appear to have declined below their year-ago levels in almost all'' regions. The same survey showed that the business slowdown that has gripped the Northeast and Middle Atlantic states is moving west.
The growth in consumer credit slowed to a seasonally adjusted $1.47 billion in October, considered by economists as another sign of weakening business activity. To attract nervous consumers, Sears, Roebuck & Co. decided to start immediately clearance sales it usually holds right after Christmas.
Productivity of workers at non-financial corporations dropped at an annual rate of 1 percent in the third quarter. Welfare rolls have grown longer in 49 states, according to an Associated Press survey.
The index of leading indicators fell for the fourth consecutive month in October, often a sign of impending or present recession. This gauge of industrial conditions fell in November to its lowest level since May 1982, apparently signaling that the whole economy is contracting.
Consumer confidence as measured by the University of Michigan suffered its most severe fall in 40 years in November.
The slowdown is ``beginning to feed on itself,'' says H. Erich Heinemann, chief economist of Ladenburg, Thalmann & Co., a brokerage house.
Reacting to the gloomy news, the Fed has moved more vigorously to revive the economy. A week ago today it lowered reserve requirements for commercial banks, the first time it has done so since 1983. The change will make available to banks about $13 billion for new lending that, the Fed hopes, will generate economic growth. The Fed said the action was taken because tightened lending standards by banks had become ``a contractionary influence on the economy.''
Further, the central bank injected more money into the banks Friday in order to push down the Federal Funds rate - the interest commercial banks charge for overnight loans to one another. That key short-term interest rate fell to 7.06 percent from about 7.25 percent. It was the third such move in six weeks.
Banks cut prime rate
Longer-term rates also began to tumble. Three regional banks Friday cut the prime lending rate for their better customers to 9.75 percent from 10 percent. Money-market participants expected larger banks to follow suit this week, though reluctantly because of the need to maintain profit levels to cover loan losses.
When major banks do move, the cost to many householders of their home-equity loans will drop.
During the long economic expansion that began at the end of 1982, the Fed eased monetary policy when signs of economic weakness appeared and managed to prevent a recession. For example, the index of leading indicators fell six months in a row in 1984. The Fed eased aggressively in mid-1984 and prevented a slump. It also eased briefly but sharply after the stock market collapse in October 1987, and the widely-predicted recession did not occur. The indicators dropped three months in a row in 1989. Again, easier monetary policy maintained growth.
To Mr. Heinemann, the Fed has not yet eased enough this time. ``We don't have a sustained, moderate increase in the core,'' he says, speaking of bank reserves.
The majority of economists now anticipate at least a mild recession lasting well into 1991. One reason why monetary easing may not avert a recession this time, according to a recent commentary by Paul Boltz, financial economist of T. Rowe Price Associates, Inc., is that interest-rate declines ``have been just too small to have much of an impact on economic behavior.''
However, economists do note some favorable elements in the economy. Exports have been doing well. The price of oil has been declining with improved prospects for peace in the Middle East. Factory orders were up 2.8 percent last month, but largely because of a surge in aircraft orders. These tend to be volatile. Spending adds to deficit
The rise in the deficit this year is blamed as much on a surge in spending as on the economic slowdown. In the budget package passed by Congress at the end of October, spending by the Departments of Labor, Education, and Health and Human Services, was set at 14 percent higher than in fiscal 1990. Highway spending was hiked 18 percent.
``Of such is deficit reduction made,'' Allen Schick, a University of Maryland professor, said in sarcasm at a Tax Foundation conference in New York last week.
The jump in spending is expected to make achievement of deficit reduction goals more difficult in later years.