Recession odds grow as Carter tightens screws
While the nation grapples with soaring inflation, a cloud of impending economic recession spreads across the United States. "By November," says former Federal Reserve Board Governor Andrew F. Brimmer, "unemployment [now 6.2 percent] will be about 7.5 percent and rising."
If he is right, more than a million more workers will have lost their jobs by the time Americans go to the polls to elect the president who will lead them for the next four years.
Expectations of recession have accelerated in the past few weeks, following President Carter's budget-balancing pledge and his call to the Federal Reserve Board (Fed) to tighten consumer credit.
No longer can families run up installment debt at a rate which, over the past year or more, resulted in a spending spree and kept the economy out of recession.
With interest rates soaring in response to the Fed's latest strictures, new housing starts are tumbling and US car makers are cutting back sharply on spring production.
"Everybody [now] is predicting a recession," said Alice M. Rivlin, director of the Congressional Budget Office, April 6 on "Face The Nation" (CBS-TV).
"The risk is," she continued, "that the combination of restrictive budgetary and restrictive monetary policy will make the recession worse."
However, added Dr. Rivlin, "no one thinks we are going to 1933 [a reference to the Great Depression], or even perhaps to 1973."
Recession in the construction and auto industries now is expected to spread more widely throughout the economy, as the Fed turns credit screws and White House and Congress reduce government spending.
"This recession," said Mr. Brimmer, who now heads his own economic consulting firm, "will be deeper and longer than would have been the case, without the latest monetary measures."
He expects the coming recession to rank with the downturn of 1957-58 as the second worst since World War II, outdone only by the recession of 1973-75 triggered by prices hikes of the Organization of Petroleum Exporting Countries.
Economic activity may drop by 2.5 percent during the second quarter of 1980, Mr. Brimmer believes, followed by a decline of about 4 percent in the third quarter, with the final three months also coming in negative.
As for the first quarter of 1980 -- January through March -- most observers believe the economy, fueled by strong consumer spending before the Fed restrictions, continued to grow.
As for the first quarter of 1980 -- January through March -- most observers believe the economy, fueled by strong consumer spending before the FED restrictions, continued to grow.
The Carter administration projects a very mild recession this year (a drop of 0.4 percent for the year), with the jobless rate standing at 7.2 percent by the end of 1980.
Despite the anticipated downturn, few experts expect much if any inflation relief this year. Even the White House, which consistently has underestimated inflation, foresees consumer prices rising this year at about the 13.3 percent pace of 1979.
Higher interest rates, President Carter's new 10-cent-a-gallon fee on gasoline, plus other factors, says Data Resources, Inc., "make anything much less than 20 percent near-term inflation most unlikely."
"Output [of goods] will dip first," says Mr. Brimmer, "followed by rising unemployment. Inflation will start to decline only about the third quarter of 1981, if the recession ends in the first quarter."
Apparently out the window is the old formula calling for inflation to subside when the US economy drops into recession.
That formula appllied to the classic kind of demand-pull inflation -- too much money chasing too few goods. Current inflation, experts agree, is swollen by special factors, insulated from traditional anti-inflation measures.
Chief among these factors are last year's spectacular rise in oil prices, a surge in mortgage costs, and a climb in the price of homes.
In the past, when unemployment rose during a recession, Congress moved quickly to expand the economy by pumping up government spending.
This time around, both President Carter and Democratic leaders of Congress insist that the fiscal 1981 budget must be balanced through spending cuts, as a first attack on inflation.
Lane Kirkland, president of the AFL-CIO, and a coalition of labor and consumer groups condemn the balanced-budget approach, claiming that the "weak, the poor, the handicapped, minorities, and the young and elderly" will suffer.