US economy spins wheels in deep rut of recession
The US economy may have hit bottom after 16 months of recession. But over the next eight or nine months it will move at a snail's pace over a rocky road to recovery, economists predict.
Between July and September, the gross national product (GNP) grew at a tepid 0.8 percent rate after adjustment for inflation, the government reported Wednesday. The gain in the nation's output of goods and services was sharply lower than the 2.1 percent increase posted in the second quarter.
''What it tells me is that the economy is really flat, but it is not deteriorating,'' says Citibank economist Allan Murray.
With elections two weeks away, the Reagan administration sought to put the best face on the statistics.
''The fundamental factors necessary for economic expansion are falling into place,'' says Commerce Secretary Malcolm Baldrige. But he admits that ''we do not yet have clear signs that general economic recovery has taken hold.''
The administration and outside forecasters agree the outlook for the final three months of 1982 is not robust.
''Fourth-quarter GNP figures will show a very small plus or a very small minus - essentially stagnation,'' says Norman Robertson, chief economist at the Mellon Bank. Mr. Baldrige admits that growth in the fourth quarter will be ''2 percent or less.''
Mr. Roberston blames a variety of factors for the poor outlook for the rest of 1982: Businesses have a lot of excess plant capacity, so they are not expected to spend much on new factories or machinery. Companies also have excess inventories, a condition that discourages them from increasing production. And Robertson says he foresees ''at best a rather modest pickup in personal income, '' which will keep consumers from going on a major buying spree.
In fact, earlier this week the Commerce Department reported that personal income rose in September at a weak, seasonally adjusted 0.3 percent rate. Although Americans' interest and dividend income rose slightly, wages and salaries fell.
''The most sobering thing we have seen is the further decline in wages and salaries because of more job losses,'' says Sandra Shaber, senior economist at Chase Econometrics, an economic consulting firm. Consumers with falling incomes are not good candidates to lead a robust recovery.
Nevertheless, during 1983 the economy will ''gradually pick up steam,'' says Steven Dobson, a vice-president and senior economist for the Bank of America. Forecasters expect a recovery to be fueled by improvements that have already taken place: federal tax cuts, less burdensome installment debt levels, and lower inflation and interest rates.
''The economic fundamentals are fairly well set for quite a strong increase in consumer purchasing,'' says David Munro, director of macro and international economics for General Motors Corporation. ''But there is a hesitancy or some problem of confidence by consumers at the moment.''
When consumers finally begin buying, they are expected to produce only a modest gain in economic output. Wharton Econometric Forecasting Associates expects the economy to post a gain in inflation-adjusted GNP of only 1.1 percent next year. But others take a somewhat more optimistic view. Economists working for firms belonging to the Business Council, a group of the largest US corporations, predict a 3 percent increase in GNP during 1983. Commerce Secretary Baldrige expects real growth ''in the area of 3 to 4 percent.''
Whatever their precise forecasts, most economists agree the recovery will be meager by historical standards and not robust enough to make a rapid dent in the nation's 10.1 percent unemployment rate. The upturn in 1983 will be ''one of the weakest recoveries since World War II,'' notes First National Bank of Chicago chief economist Ray Moore.
In previous recoveries, growth rates of 5 to 7 percent have been posted for a year or more. But now economists note that firms are less likely to build inventories and federal fiscal policy is less stimulative.
''We are not going to get that kind of boost in this recovery,'' Mr. Munro says.
The relatively mild pace of recovery should help keep inflation down. Prices, as measured by the GNP's implicit price deflator, rose 6.1 percent in the third quarter vs. 4.1 percent in the second.
''We don't see it going up'' beyond 6 percent during 1983, Mr. Dobson says.
With inflation at lower levels, interest rates may decline somewhat. The move is likely to be greatest in long-term rates because lenders have currently built in a larger than normal inflation protection factor. With recent changes in Federal Reserve policy ''the likelihood the prime will go below 10 is greater. We could see a 9 percent prime'' in 1983, according to Nariman Behravesh, director of economic policy analysis for Wharton Econometric Forecasting Associates.
The lower rates will help the key auto and housing industries. Housing is already showing signs of renewal since the government reported earlier this week that single-family housing starts rose 6.6 percent in September. Mellon Bank predicts that housing starts could total between 1.3 million and 1.4 million in 1983 vs. the current 1.14 million rate.
While the outlook is improving for consumer spending, it remains bleak for major business investment because of the significant excess capacity firms now have. As a result they have little incentive to purchase new factories or equipment.
''The recession in capital spending is really just getting underway,'' says First National Bank of Chicago economist Moore. Adds Mellon economist Robertson: ''There is going to be a continued decline in fixed investment spending well into next year.''