A More Severe Slump

As the recession intensifies, fears grow that unemployment will top 9%

Like a pilot bailing out of a flaming aircraft and then waiting terror-stricken to see if his parachute will open, American businessmen and economists hung impatiently last week trying to see how deep the recession of 1980 would go. Just about everybody agrees by now that the nation is in a slump, yet no one knows whether plummeting interest rates, soaring unemployment and lethargic consumer spending foretell an economic decline that will be brief or prolonged, shallow or deep.

There was certainly enough material for the bad news bears. The nation's industrial production declined 1.9% in April, the sharpest drop since February 1975. The housing industry continued its free fall, as starts on single-family homes fell to their lowest level in ten years. Alan Greenspan, President Ford's chief economic adviser, predicted that the nation's business output would decline this spring at an annual rate of 7.7%, while Data Resources, Inc., in Lexington, Mass., saw an 8.1% drop.

What particularly troubled some corporate executives was the sharp .8% increase in unemployment that occurred in April alone, sending the overall rate to 7%. Mindful that the jobless rate jumped from 4.8% to 9% in the 1973-75 recession, a few warned last week that the Administration's stringent anti-inflation policies could quickly push joblessness from its current 7% level to a chilling 12% or beyond by early next year.

Economists readily admit that they do not know how high unemployment will go in this recession. Confessed one top White House policymaker: "We've simply thrown away the textbook on this one. We've never started a downturn with such a high unemployment rate."

Despite the sharp dive, the slump continues to look like a "two-and-a-half industry recession," according to Michael Evans, a private Washington economist. The two: autos and housing. The half: recreational products like vans, boats and outboard motors. All three areas represent purchases that consumers are generally able to postpone in times of economic uncertainty. In addition to the housing drop, auto sales declined 42% in the first ten days of May over the same period last year, and sales of recreational vehicles were off 40% in the first quarter.

In those fields and others closely related, unemployment is indeed soaring. Michigan Budget Director Gerald Miller expects the jobless rate in his state to jump to 15% or 16% by next month. Says June Collier, president of National Industries, a Montgomery, Ala., firm that makes electrical equipment used by Ford and Chrysler: "In the next couple of months we can see the unemployment rate hitting the 15% mark."

Surprisingly, in some areas unemployment is no real problem. Massachusetts, the buckle on the formerly declining New England snow belt, is enjoying something of a boom due to prosperous high-technology firms. An official of Raytheon, the flourishing electronics firm near Boston, says, "The level of our unemployment is lost in the noise. It's hardly worth talking about." Frank Whitfield, vice president of Whitfield Pickle Co. in Montgomery, Ala., says his only problem is that he cannot get enough cucumbers. "At my plant we let 77 people go. It was not because of the economy but because we cannot get raw materials." In California the aerospace industry has seldom been hotter. Says William Perreault, vice president of Lockheed Corp.: "We're hard put to get the people we need."

With the current recession shaping up as a regional rather than a national phenomenon, the real suffering is largely limited to a crescent encompassing the aging industrial cities tied to the auto industry --Pittsburgh, Detroit and Chicago--plus many of the farm states. Farmers are suffering from the ancient miseries of drought and locusts in addition to the more modern plagues of low commodity prices and high interest rates. The situation is particularly grim in the Dakotas and Minnesota, where spring wheat is coming up brown for lack of rain.

While the economy continues its steep decline, most economists still do not foresee dramatic runups of unemployment as in 1974. The consensus is for a recessionary unemployment peak of about 8% by year's end. Leif Olsen, chief economist of New York's Citibank, says that talk of 12% is a "bit panicky." Says AFL-CIO President Lane Kirkland: "Unemployment is going to be in excess of 8% by the end of the year under present circumstances." But Economist Michael Wachter of the University of Pennsylvania, among the most pessimistic on jobs, sees the rate reaching a high of 10%.

The relative employment optimism among economists is based on the current moderate levels of business inventories and the expectation that the recession will end by early next year. Unlike 1973, when businesses started the recession with large stocks of unsold goods, they now have modest inventories. This economic downturn has been predicted for so long that companies have kept a tighter grip on production and not amassed excessive backlogs. A drop in customers thus will not result in immediate widespread firings. Says a Capitol Hill economist: "In certain industries inventories are getting out of line with demand, but we're still avoiding the speculative buildup we had in 1974."

As long as it appears that the recession will not be extremely long, companies will be slow to fire too many workers. Because of the high costs of hiring and training new employees, some managers will keep underemployed, unproductive workers on the payroll during a short recession in anticipation of a quick economic upswing. People working in banks or insurance companies are thus less likely to be laid off now than are auto assembly line employees. But if companies believe that the recession will last longer than expected, that situation could change very rapidly.

While almost all forecasters expect unemployment to grow, they predict only scant relief from high prices. Federal Reserve Chairman Paul Volcker sees a "reasonable prospect" that inflation may drop from the current 18% to about 10% before the end of the year. Then he quickly adds, "But that can only be a first step, and in some ways the easiest step, on the road to price stability." The last miles on the road back from inflation are sure to be the toughest ones.

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