No recession likely before 1981
It is unlikely that a recession will develop before the November elections, in spite of President Carter's latest round of anti-inflation measures. This is a widely held view among economists.
but the differ greatly over whether the drop-off in economic activity will be severe after next fall, or merely the "hiccup" that the administration is predicting.
However, one thing remains clear from conversations with businessmen and economists: the American economy is still forging ahead.
"It looks like the first quarter is going to be positive -- and possibly the second and third quarters as well," states Walter Hoadley, economist and executive vice-president of Bank of America.
John McDevitt, an economist at 3M Corporation in St. Paul, Minn., even expects the economy to extend itself further -- staying strong until 1981."If we are to have a recession," he states, "it will be tied to the increase in social security tax in 1981 that will further reduce consumer income."
However, economist Jeff Nichols of Argus Research argues that the Federal Reserve Board's actions taken last October to stop inflation and hike interest rates are just now beginning to have an impact. This impact will become more severe in the latter half of the year, he says, once the latest round of credit-tightening actions is felt.
"I see a more gloomy economic environment ahead," he forecasts.
And Salomon Brothers economist and general partner Henry Kaufman says he believes the President's actions bring the recession "a little closer." But he adds: "Its magnitude still seems to hinge very much on the unfolding drama in the credit markets."
This drama has seen at least a full act of tragedy as the bond market -- long the mechanism for raising money -- has collapsed. Unless the government is able to establish a stable bond market, borrowing will completely dry up, as will capital spending -- the driving force of the economy this year.
In fact, on March 17 Paul Volcker, chairman of the Federal Reserve Board, warned the nation's top 65 bankers that they must not make short-term loans to corporations which were unable to obtain money in the tumultous long-term bond markets. This borrowing recently has made it difficult for the Fed to control the nation's money supply.
The collapse in the bond market has had no immediate impact. Business around the country remains good.Terrance Bruggeman, treasurer for Chicago-based Gould Inc., reports that his company's "level of business by and large remains good."
He says the number of customers asking his firm, maker of batteries and capital goods, for price quotes remains near and all-time high although it's taking longer for them to place orders. Mr. Bruggeman says that even though the level of confidence in the economy remains fragile, it has yet to translate negatively into the order book.
Minneapolis-based Toro Corporation, which makes lawnowers and snow removal equipment, says it has yet to see the recession surface in its order books. Toro president Jack Cantu recently queried the company's truck drivers on their feeling about the buying habits of consumers. He came away with the feeling people were still buying. And Alfred Rosenblatt, managing editor of Electronics Magazine, in New York, says the electronics industry now is taking about a slowdown in the fourth-quarter -- another sign orders remain strong.
However, economist Richard Hoey of Bache Halsey Stuart Shields, Inc., believes the consumer pullback is near. With incomes sliced by inflation, consumers soon will find that their credit being infringed upon by the President's recent actions, he says. Thus, he contends, "we will have a consumer-led recession."
This recession, however, will not be followed by a normal rebound, in Mr. Hoey's opinion. Rather, he expects a prolonged period of sub-par growth.
According to Gordon whorley, executive vice-president of Chicago-based retailer Montgomery Ward, the signs of a consumer pullback have already surfaced in retailing. Demand for consumer credit, he says, came down in January and February. Thus, he states, "I'm not sure the President's consumer credit control actions were really necessary."
In fact, Mr. Whorley believes the credit tightening proposals will hurt small retailers, already feeling a profit squeeze. He predicts that during the recession many small retailers will go bankrupt, while larger ones will see their earnings decline. He expects the recession will be of a "rolling nature," hitting first one industry and then another.
Mr. McDevitt makes the point that some sections of the country should fare much better once the slowdown does begin. These sections include the West Coast , Pacific Northwest, and Southwest. However, the Midwest and East should feel the full impact of the recession, he says.
Many economists say that, because federal spending will not be cut appreciably this year, they do not expect to see a slowdown until the second half of the year. Only $2 billion will be cut from the current (fiscal 1980) budget if President Carter's proposals are followed.