US Economy at Critical Juncture, Economists Say
Business decisionmakers complain that Washington gives mixed policy signals
IN January, Lex Taylor stopped hiring new people at his Louisville, Miss., forklift plant.
"We just don't know what is going to happen. What is health care going to cost us and what is going to happen to taxation?" says Mr. Taylor, president of Taylor Machine Works, which employs about 700 people.
Taylor is not alone. Business executives and economists say the United States economy has now reached a critical juncture.
"People are very concerned about the future," says economist Paul Kasriel, a vice president at Northern Trust Company in Chicago. This concern is reflected in consumer confidence, which plummeted in May, according to a Conference Board survey. And there are some disturbing portents that the US economy might be slipping back into neutral.
Last Friday, the US Commerce Department reported the nation's first quarter gross domestic product (GDP), the nation's output of goods and services, was weaker than originally reported. The government revised the first quarter growth rate down from a 1.8 percent real annual rate to only a 0.9 percent rate. On Thursday, the government reported durable goods orders for April were weaker than expected.
The GDP growth was adversely affected by the weather in March and is expected to bounce back. Merrill Lynch chief economist Donald Straszheim forecasts GDP to grow at a 2.5 percent rate or higher in the second quarter. Mr. Straszheim frets that the durable goods report indicates that the industrial sector is losing momentum.
Businesses offer some anecdotal evidence the economy is on a stop-and-start course. "Our business has been like a stair step - it improves, then goes sideways, then down," says Richard Stuckey, chief economist for the DuPont Company in Wilmington, Del. Looking at DuPont's order books, Mr. Stuckey says, "There is not a pattern you have a lot of confidence in."
In a survey released today of 15,000 businesses, Manpower Inc. reports little corporate enthusiasm for adding staff over the next three months. "Despite the fact that 1 of every 4 businesses plans to add workers in the third quarter, the broad outlook lacks the robustness seen in the 1983-84 recovery period," says Mitchell Fromstein, president of the Milwaukee-based company. Waiting for Washington
The Kiva Container Corporation in Phoenix is also feeling the effects of uncertainty. "We see a little spurt and then orders fall back," says Ruth Stafford, treasurer. She blames part of the cutbacks on uncertainty over policy in Washington.
One result she observes: "People are afraid of putting inventory on the floor." She says customers are cuttin costs by using one color on cardboard containers instead of multiples.
Business executives also report that export orders have slowed considerably. Taylor, the forklift company, has seen its exports start to dwindle. "The European economy is so devastated," explains Taylor. A better exchange rate has given his European competitors a significant advantage, he complains.
Even businesses with relatively healthy orders are cautious. For example, the Association of Home Appliance Manufacturers reports a relatively healthy April. However, spokeswoman Judy Viso says, "We will be watching June and July to see if our pattern of solid sales continues." Inflation watch
The economic flux comes at a critical moment for the credit markets, says William Sullivan, senior vice president at Dean Witter Reynolds Inc. Bond market analysts are watching inflationary signs with a wary eye after a flare-up in the consumer and producer price indices in April. "If the economy starts to gain momentum, it would reinforce fears that the best news on inflation is behind us," says Mr. Sullivan.
Last week, the inflation fears kindled concern the Federal Reserve Board might raise interest rates. These concerns were heightened when Fed Chairman Alan Greenspan pointed to relatively robust auto sales in May and there were reports the Fed would have a "bias" toward higher short-term interest rates.
However, credit market watchers are not convinced that the Fed will really tighten up. "Other than auto sales there is not a lot of strength in consumer spending," Mr. Kasriel says.
With investors nervous about inflation, there has been a more intense scrutiny of President Clinton's fiscal management in Washington. Last week, Mr. Clinton won his first big battle over his plan to raise taxes and trim spending by about $350 billion over the next five years.
Many economists question the timing of the tax increases. "The portent of higher taxes has spooked consumers," says J. Patrick Bradley, chief economist at Provident National Bank in Philadelphia. Mark Melcher, an analyst with Prudential Securities in Washington says he thinks the tax hikes "can't be anything but disastrous for the economy."