US expansion on track. Growth moderate, but labor shortages dampen forecast
The Dunlop Tire Corporation is scheduling overtime every other week. But it has enough orders to keep its work force in overtime every week. ``You have to give people time off,'' says Randy Clark, chairman of the Buffalo, N.Y., company. If there is a recession on the horizon, Mr. Clark says, ``I don't see it.''
Neither do most other economists.
The conventional wisdom on the outlook for 1989 is for moderate growth, inflation in check, and lower interest rates later in the year (industrial countries thrive in '88, Page 7).
This view was reinforced yesterday when the Commerce Department reported a downward revision of the third-quarter gross national product from 2.6 to 2.5 percent. The government also reported that the consumer price index for November rose 0.3 percent, compared with 0.4 percent for October.
The 51 economists polled in early December by Blue Chip Economic Indicators in Sedona, Ariz., expect real growth of the gross national product will be 2.6 percent 1989. Only 20 percent of the economists expect a recession next year. Earlier in the year, the majority expected a downturn.
Yet as the economy enters the seventh year of economic growth, there are crosscurrents bringing questions to the surface about this ``soft landing'' forecast.
Take Mr. Clark's factory. It has been running flat out for the whole year despite adding 30 percent new capacity. To fill orders, it is importing tires from other Dunlop factories around the globe. It recently had trouble getting the steel wire cord used to make steel belted radial tires and is now importing the steel. ``The question is, can we find enough labor and raw materials?'' Clark asks.
There are anecdotal signs that such shortages are beginning to have an effect on the economy. In Peoria, Ill., Caterpillar Inc. complains that it, too, is having trouble getting steel. This past year it paid 20 percent more for the metal. Of even greater concern to Caterpillar is a prospective duty of 40 to 250 percent on imported bearings. US manufacturers are now running at capacity. ``Clearly this has an impact on our ability to export,'' says William Canis, a company spokesman.
There is no question that the good times are benefiting workers. According to the Bureau of Labor Statistics, the average factory worker is now laboring 41 hours per week, including four hours of overtime.
``People are not only working overtime, but they are hiring new workers,'' says Samuel Ehrenhalt, a regional commissioner of the Bureau of Labor Statistics. Companies are raiding each other for new workers. A key question for companies planning new factories is the availability of English-speaking women, who are the majority of new workers for the work force.
Audrey Freedman, an economist with the Conference Board, says the segment of the producer price index - an inflation gauge of the cost of labor - is starting to curl upward. ``It's not rampant inflation, but it is a reversal from last year,'' she explains.
Government figures show that wages for nonunion workers are rising at a 4 percent rate in 1988. By next year, she projects, it will be rising at a 5 percent rate.
Looming over the labor question is what effect it will have on Federal Reserve policy next year.
Robert Dederick, a former Commerce Department official, believes the Fed will examine these statistics and start to tighten interest rates by early spring. But, Richard Hoey, chief economist at Drexel Burnham Lambert Inc., thinks the Fed might not apply the brakes until midyear. ``The Fed has been lagging the economy. It is a reactive Fed, not a pro-active Fed,'' he says.
In fact, 1989 should be an interesting year for Fed-watchers. Mr. Hoey believes the members of the Federal Open Market Committee are split in their views, ``creating a natural bias toward half measures.'' Recently the committee was unable to agree on the need for a rise in the discount rate, the rate banks charge other banks, even though short-term interest rates had risen sharply.
Despite such caution by the Fed, many Wall Street firms are now predicting that interest rates will be higher early next year. Salomon Brothers Inc. forecasts that short-term interest rates will rise more than 9 percent in the first half of 1989 and long-term Treasury bills will climb to 9 percent from about 9 percent now. Merrill Lynch & Co. expects higher rates, but expects them to decline later in the year as the economy slows.
A slowing of the economy would put a crimp in President-elect George Bush's plans. The cornerstone of his ``flexible freeze'' approach to the budget deficit requires above-average economic growth. As Salomon Brothers Inc. notes, the final confrontation between Congress and the President over spending will take place between August and October, when a new debt ceiling must be approved, or across-the-board spending cuts take place. Hoey predicts that should the Fed push the economy into a tailspin, Congress will miss its $100 billion Gramm-Rudman deficit reduction target by more than $100 billion.
Many of the nation's top corporations, in fact, are planning on lower growth in the economy.
Although consumer confidence is high at the moment, David Munro, an economist with General Motors, predicts a period of ``sluggish growth.'' He reasons that the stock and bond markets might not be as buoyant as they have been over the last few years. Feeling less wealthy, consumers will reduce their purchases.
Sales will drop, but he predicts it will still be a ``good'' year for the auto industry, with total sales of 15 million vehicles, down from 15.75 million.
One reason many industries are optimistic that the slowdown will not lead to a recession is that inventories are low. Ben Slatin, an economist at the American Paper Institute, finds no sign of excessive inventories at either paper mills or paperboard plants. ``The likelihood of an inventory recession is not large,'' he predicts.
If the economy does slow, this could help to lower the trade deficit. Even without a recession, the trade deficit will improve by another $15 billion - dropping to the $120 billion range - as a lower-valued dollar makes imports more expensive, according to Helen Hotchkiss, a senior economist at Drexel Burnham Lambert Inc.
Even at this level the administration will still find itself under pressure to act. If Mr. Bush brings trade actions against some of the countries that restrict US exports, says Michael Aho, a fellow at the Council on Foreign Relations in New York, ``then the President will get a lot of mileage on the Hill.''