Fading recession leaves some forecasters on a limb
The most widely advertised recession in America's history has failed to arrive -- leaving some economists with red faces. However, "The illusive American recession is at hand," says Sherman Robertson , senior vice-president and chief economist of the Pittsburg-based Mellon Bank.
Opening a prestigious Financial Times newspaper conference on Euromarkets in 1980, he assured several hundred gray-flanned international delegates that the outlook was not one of "unrelieved gloom and despondency." "The downturn that lies ahead is going to be mild, barely qualifying for the label 'recession,'" he said.
But why did the anticipated slowdown not show up earlier?
Because of a surprising reversal of the patterns evidenced during America's 1973 recession. The reversal entailed:
* A significant fall in the savings rate (the ratio of savings to after-tax income) to 3.5 percent -- the lowest in nearly 30 years, down from 7.5 percent in 1973-74. Consumers, instead of reducing demand, maintained their lifestyles by cutting back on savings -- injecting $50 billion into the economy.
* An increase in debt. During 1979, installment debt repayments rose to 18 percent of after-tax income -- the highest since World War II.
* The housing market boomed as investors bought residential real estate as a hedge against inflation. Part of the impetus for increased home-buying: The number of two-income families has grown by 4 million over the past decade.
Mr. Robertson's relatively sanguine forecast is based on several notable underlying strengths of the American economy. For one thing, he noted that the foreign trade figures -- if the enormous bill for imported oil was discounted -- showed considerable growth: non-oil trade produced a surplus of almost $32 billion in 1979, compared with $7 billion in 1978.
For another, America's energy use is not as profligate as it has been pictured. Until 1973 a 1 percent growth in real gross national product required a 1 percent growth in energy use -- a figure that has now been cut to 0.63 percent.
Another factor boosting future economic activity, according to Mr. Robertson, will be defense spending. Events in Afghanistan and Iran have touched off what he calls "the most formidable foreign-policy challenge since World War II."
Future increases in defense spending, he believes, will top President Carter's call for a 4.5 percent increase. Since the peak of Vietnam spending in 1968, US defense spending has fallen by 35 percent -- while Soviet spending in 1979 was at best estimates, some $40 billion higher than America's spending.
Mr. Robertson sees a defense buildup between 1980 and 1985 which will exceed or closely match the $32 billion buildup from 1965 to 1968.