A Borderline Case of Recession?

WHEN I use a word," Humpty Dumpty told Alice in Through the Looking Glass, "it means just what I choose it to mean--neither more nor less." To a layman, that might seem to sum up the spirit in which economists are now debating whether the U.S. is undergoing a "recession."

The question becomes more insistent with each new crop of statistics. Last week automakers disclosed that in the middle ten days of February sales of new cars dropped 19% below the same period last year. General Motors scheduled temporary shutdowns of ten assembly plants, Ford of six. The two automakers announced indefinite layoffs for 5,200 workers. The Government reported a 6% January drop in durable goods orders, the sharpest decline since 1964; and the index of leading indicators dropped 1.8% in January, its largest decline since October 1957, when the economy was heading into the deepest postwar U.S. recession.

The Arbiter. The more economists ponder whether these and other signs add up to a recession, the more they realize, as chief Presidential Economic Adviser Paul McCracken puts it, "The word itself is not an unambiguously precise term." There is really only one reliable definition: if experts of the National Bureau of Economic Research decide to call a business decline a recession, so shall it be known. But the NBER only identifies recessions long after they have begun, and by a complex process that yields no hard and fast criteria. The behavior of gross national product, industrial production, employment, personal income and many other statistics are matched against their performance in past periods designated as recessions, and NBER analysts decide if the patterns are basically similar.

Many economists have adopted as an informal definition of recession a decline in real gross national product--that is, G.N.P. minus the effect of inflation--in two successive quarters. Such a decline has never occurred except during a cycle that the NBER calls a recession. Last week McCracken dismissed the simple definition as "nonsense." Trying to frame a standard so exact, he said, is as "pointless" as trying to determine "the exact minimum number of whiskers that qualify to be called a beard."

Semantic Fog. The closest thing to a Nixon Administration definition of recession is the "adjectival" standard advanced by McCracken: a recession is "a substantial and broadly based decline in business activity that runs for a considerable span of time." Presumably using some such criteria, Arthur Burns, the new chairman of the Federal Reserve Board, told the Congressional Joint Economic Committee two weeks ago that we do not have a recession and I do not think we are going to have it." A the same hearing, Burns and McCracken conceded that U.S. production is dropping and will probably remain flat for awhile. They also agreed that the 1970 unemployment rate is likely to average 4.3%, v. 3.5% in 1969.

At their latest meeting members of TIME's Board of Economists (see box) pointed to a clear reason for the semantic fog. The U.S. is experiencing something unusual: a business downturn that is likely to be sufficiently long and painful to meet some definitions of recession, but not severe enough to bring the drastic declines in production, employment and profits associated with unmistakable recessions.

That expectation marks a considerable change in the board's thinking. At past meetings, several members maintained that a borderline recession was about as possible as a borderline pregnancy. In December, for example, Arthur Okun declared: "It seems unlikely to me that things will be so poised on the razor's edge that everybody will be scratching his head and saying, 'Should we begin calling this a recession or not?'

Mini-Micro. Now Walter Heller makes this forecast: real G.N.P. may decline at annual rates of 0.5% this quarter and next, on top of a drop at an annual rate of 0.4% in the last quarter of 1969. An upturn will begin in the second half, fueled by higher Social Security benefits and the scheduled July end to the income surtax. By the fourth quarter, the rebound will have "visible means of support." Dollar G.N.P. for 1970 will run between $980 billion and $985 billion, about $5 billion below the most common forecast of board members last December, but just where the Nixon Administration expects it to be. Corporate profits after taxes will drop 5% to 9% below the $50.8 billion of 1969, and unemployment could rise to a peak of 4.5% to 5% late in the year, just about what CEA Chairman McCracken also seems to expect. Okun, Joseph Pechman and David Grove generally support Heller's forecast,* though they disagree on some details. Okun and Pechman, for instance, forecast a 3% to 6% drop in after-tax profits this year.

Many businessmen would feel the pangs of any such downturn, but the pain would be mild compared with what happened in the four full-sized recessions of the past two decades. Industrial production dropped as much as 15%, corporate profits fell 21% to 30%, and unemployment rates hit peaks of 6% to 8%. Heller says it is a toss-up whether the situation the board majority foresees should be called a recession; he suggests "mini-micro recession." The important thing, adds Pechman, is that 'the U.S. is experiencing "a policy-induced pause" because of severe monetary and fiscal restraint on a naturally ebullient economy, rather than the more dangerous type of recession that is caused by basic weakness in business.

Rising Risk. TIME's economic panel feels much more strongly today than it did last fall that the Federal Reserve Board has increased the risk of recession by refusing for too long to permit any increase in the nation's money supply. Last fall Okun saw a 25% chance of unmistakable recession in 1970 and a 10% chance of continued boom. Now he thinks the chance of a continued boom has fallen to zero and the likelihood of a full-blown recession has risen to 35%.

Wall Street and the financial markets are obsessed by the question of how soon and how much the Federal Reserve may ease money and credit. The stock market is so hungry for easier credit that the Dow-Jones industrial average bounded 20 points last week in a euphoric reaction to cuts in the prime lending rate, from 8 1/2% to 8%, by two small banks in Philadelphia and Bakersfield, Calif. Major banks, however, scoffed at the idea of reducing their loan charges now.

For most of last month, bond prices rose and interest yields fell on the expectation of an imminent relaxation of monetary policy. During February 91-day Treasury bills sold at yields as low as 6.76%, the lowest figure since last June, a drop of 1.33% from their December peak.

Rewriting the Books. Members of the Board of Economists predict that the Federal Reserve will soon begin expanding the money supply again, but only at about a 2% annual rate. Unanimously, they judge that move to be inadequate as well as overdue. David Grove argues that the Reserve Board should aim for a money-supply increase averaging 3% to 4% at an annual rate over the next six months. Other members disagree only over whether the Reserve Board should reach that target gradually, as Heller and Pechman prefer, or immediately, to make up for having been too stringent too long, as Sprinkel and Okun urge.

The Federal Reserve has continued monetary restraint so long because its members fear that inflationary pressures are still great. The consumer price index in both December and January rose at a startling annual rate of 7.2%. Members of the Board of Economists, however, are confident that the rate of price increases will soon begin to slow. They insist that the "pause" they foresee, whether or not it qualifies as a recession, will remove inflationary steam from the economy. Says Okun: "The amount and magnitude and duration of the current slowdown will begin to affect the price and wage curves in the near future--not dramatically at first, not consistently, but will affect them. If they do not, I do not know what we are going to do. We will resign--or write new textbooks."

* In dissent, Beryl Sprinkel argues that the leading indicators "have never been any weaker in modern times," judging by the percentage that are going down v. the percentage still rising. He forecasts a recession at least as severe as the one in 1960-61.

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