America's 6-month-old recession -- Will it be a 'V,' a 'U,' or an 'L'?
A V-shaped recession, an L, or a U? On the answer to that question, debated by experts in an arcane shorthand of their own, hang the hopes, pocketbooks, and even jobs of millions of American families.
How long, in other words, will the current recession -- seventh since World War II -- last, and what kind of recovery will ensue?
A recession shaped like a V implies a sharp drop, followed by swift recovery. An L shape also describes a sharp drop, followed by slow, flat recovery. A U-shaped decline is a more gentle version of the V.
Many analysts say they believe that L may turn out to fit the current situation -- very sharp decline, sudden bottoming out, painfully slow recovery.
Almost everyone now agrees that the current setback will not match, in length or severity, the recession of 1974-75, which lasted 16 months and dropped the nation's output of goods and services by 5.7 percent.
This year's recession, according to the National Bureau of Economic Research, began in February 1980 and, by a consensus of experts in and out of government, may persist through this year and possibly until early 1981.
That would put it at about the average 11-month length of postwar declines, with a slightly greater drop in output than the 3 percent average of the last six recessions.
White House officials, said Charles L. Schultze, chairman of the Council of Economic Advisers (CEA), foresee a "three-quarters" recession, "bottoming out in the fourth quarter of 1980."
The nation's gross national product (GNP), or total output of goods and services, fell by a thumping 9.1 percent in the April-June quarter, following a meager 1.2 percent rise in the first three months.
The current (third) quarter also is expected to show a decline, with the final quarter of the year essentially "at a zero growth rate," said Mr. Schultze in a telephone interview.
The CEA estimate, if correct, would place the duration of the recession at about nine months, slightly shorter than the post war average.
What does it all mean in terms of unemployment, inflation, interest rates, and other key measurements directly affecting families?
Unemployment: Now 7.8 percent, the jobless rate may climb to 8.5 percent by year's end, the White House calculates, and could peak at about 9 percent early next year.
Unemployment is a "lagging indicator." Often it goes on climbing for several months after the economy begins to pick up.
Most businessmen lay off workers only as a last resort, usually after recession is well established. Conversely, when recovery begins employers often have large inventories of unsold goods to work off before they start rehiring.
Inflation: The picture is mixed. Consumer prices, because of lower interest rates -- and assuming oil prices do not shoot up again -- should decline by the end of 1980 from the torrid 18 percent pace of early 1980 to the 10 to 12 percent inflation range.
Fed by rising wage and other labor costs, however, the underlying -- or real -- rate of inflation, measured across the whole economy, is still climbing, now standing at roughly 10 percent.
This breeds caution among President Carter's economic advisers, who oppose either a premature tax cut or swollen government spending, both of which would stimulate inflation.
Interest rates: Following their dizzling roller coaster ride up and down this year, money market rates again are rising, though slowly.
Analysts had expected this correction. But it might, if persistent, limit what had appeared to be the beginning of an upturn in the depressed housing market.
When high interest rates are available to savers, they tend to put less money into the thrift institutions which provide mortgage funds.
So far, however, housing starts are up, new building permits are on the rise, and the inventory of unsold homes is being whittled down. This, in fact, is one of the major reasons why most economists believe that the worst of the current recession is over.
Consumer spending: After a steep four-month decline, retail sales have begun to rise, heralding more confidence among consumers. Auto sales, though still low, are benefiting.
Next year, however, families will be hit by sharply higher payroll (social security) taxes, together with increased income-tax levies, to the extent that inflation pushes them into higher brackets.
This could stifle consumer spending and hobble economic recovery, since spending by American consumers accounts for two-thirds of the nation's GNP.
Some degree of offsetting tax relief is highly likely next year, though the timing and kind of cuts still must be worked out by White House and Congress.
Federal Reserve policy: Convinced that underlying inflation remains the country's No. 1 economic problem, the Fed intends to keep a tight lid on the growth of money and credit -- still another contribution toward twisting this recession into the shape of L.