Squeeze on Shoppers Means Slow Recovery
SOONER or later, recessions always end. However, a tangled web of short- and long-term problems suggests that recovery from the 1990-91 downturn in the United States may be slower and more painful than the financial community or the political establishment now anticipate. Looking ahead six to nine months, consumers will hold the key to the eventual rebound. That is typical of most recession/recovery periods. Unfortunately shoppers are now caught in a tight squeeze between falling income and rising federal, state, and local taxes.
Adjusted for inflation, and exclusive of government handouts, personal income dropped at an annual rate of 6.3 percent in January and February. At the same time, real personal tax payments rose at a rate of 3.1 percent.
Not only did unemployment soar in March to a seven-year high of 8.6 million, but total hours worked fell sharply. The Labor Department's index of aggregate hours worked dropped at an annual rate of 5.6 percent during the first three months of 1991. That is a tip-off that the overall output of goods and services showed a similar slump in the first quarter.
Looking ahead to the end of the decade, a long, deep recession in 1990 and 1991 will surely exacerbate the progressive slowdown in both the economy and living standards over the past four decades. An important reason for the slowdown is the fact that net saving and investment in the US fell to a fraction of their postwar norms during the 1980s.
In a pioneering study, the New York Federal Reserve Bank found that this "has caused a steady erosion in the nation's growth potential and has been accompanied by a sharp increase in net indebtedness to foreigners."
The bank observed that "rising environmental costs, increasing payments to foreign owners of US assets and a growing retirement population will make an increasing claim on the output" of the US economy. "Continued low saving and investment reduces the nation's ability to respond to this squeeze on living standards."
Short-run, most of the eight postwar recession/recovery cycles were driven by swings in inventories - down and then up. The 1990-91 recession is different. Computer-based controls have dampened gyrations in stocks of unsold goods. Inventory problems are no longer a primary source of economic instability.
Apart from the modest shock effect of the Gulf war, the principal force behind the current downturn was the overriding need of US business to restore profit margins. As a result, business managers may continue to cut employment for some time.
According to the Labor Department, over the past six months three-quarters of the industries that it monitors regularly were either not hiring or were laying off, an unusually high percentage. Business people will not rehire the workers they have let go - or, more important, increase their work forces - until they are convinced that raising the head count will also add to profits.
Profit per dollar of sales or profit per newly hired worker - take your pick, all the key measures of profitability have been on the skids for at least two years. During the fourth quarter of 1990, domestic profits after tax from current operations came to about 3 cents for every dollar of revenue. That was the lowest level since the Great Depression.
Long-run, perhaps the recession will help US voters realize that the downturn reflects basic issues which require equally basic changes in policy. George Hatsopoulous, chairman of Thermo Electron Corporation, observed the other day that "Americans have seen their wages stagnate over the past dozen years, but attribute the problem to everyone but themselves."
Mr. Hatsopoulos went on to say "that the economic problems we face are of our own making, and they are not caused by foreigners. If we continue to consume 96 percent of our national income and save only 4 percent, if we continue to depend on foreign lenders to finance our budget deficit, and if we continue to demand more government spending without increasing taxes, our future is bleak." Amen.
