US economy's tug of war: early upturn in output seen
American industry has about hit bottom and should soon start on a slow climb out of the recession, economists say.
''It is likely that December will be a flat month, with January the first positive one'' in terms of industrial production, says Donald H. Straszheim, vice-president of Wharton Econometric Forecasting Associates. In November, factory output declined 0.4 percent, its lowest level in five years. An upturn in consumer buying, spurred by falling interest rates, is the most important reason factory fortunes are expected to change soon.
''While consumer spending has not taken off, there has been modest improvement, and there is good reason to believe consumer spending will (continue to) pick up,'' says Sandra Shaber, senior economist at Chase Econometrics, a forecasting firm.
Signs of stronger consumer spending include a 2.3 percent gain in November retail sales and a 14 percent rise in car sales in early December. And, expecting consumer pocketbooks to stay open, builders in November started new homes at a rate 26.5 percent faster than in October.
While waiting for people to start buying again, manufacturers have kept inventories at low levels. So Christmas buying will likely pare down stocks to a level where increased production will be required.
''As interest rates come down some more and consumer spending picks up, there will be a need to rebuild inventories,'' says Robert Gough, senior vice-president of Data Resources Inc., another forecasting firm. ''And in order to do that you need additional production.''
Still, not all the cylinders in the US economic engine will be firing smoothly in January. ''Some sectors will still be sliding and will have another month or two (of downturn) to go,'' says Ms. Chase, the Shaber economist. These include the ''smokestack'' industries of steel, farm equipment, and machine tools.
One reason equipmentmakers will not get off to a blazing start in the new year is the large amount of unused capacity that companies have at their disposal. In November, they were using only 67.8 percent of their production capacity, the lowest level in 34 years.
Those with underutilized factories have little incentive to buy new equipment. ''Anything that has to do with capital equipment is very weak,'' Ms. Shaber said.
''In four to six months you will see some stimulation of capital investment, '' Commerce Secretary Malcolm Baldrige told reporters over breakfast recently. ''But that comes after the first wave of consumer buying.'' Private forcecasters expect capital spending to decline in the first half of 1983.
With some sectors lagging behind, industrial production in the first half of the year will rise at a 4.5 percent rate and at more than 7 percent in the second half, says Wharton's Mr. Straszheim. ''That is not especially inspiring as recovery periods go. You could add 3 percent to those rates'' in a typical recovery, he says. Industrial production is down 11.9 percent since the recession began in July 1981.
Since production is expected to recover at a modest rate, companies will end 1983 with large amounts of unused capacity. ''Capacity utilization will get into the 70 perent range,'' says Charles Steindel, senior domestic economist for the First National Bank of Chicago. By contrast, in March 1979, 87.2 percent of productive capacity was being used.
Unfortunately the expected 7 percent improvement in corporate fortunes is not expected to produce a major reduction in unemployment. Unemployment ''will be stubbornly high for the first part of the year,'' Secretary Baldrige said. Most private economists do not expect the unemployment rate to drop much below 10 percent next year.