Slow Rebound from Recession

By Christopher Byron

The TIME Board of Economists sees sluggish growth and stinging inflation

Ever since the nation first began slumping into recession last winter, economists have been warning that it would prove diabolically difficult for the U.S. to climb back to sustained growth without aggravating inflation. Last week, with the downturn already showing signs of beginning to bottom out, members of TIME'S Board of Economists somberly concluded that this recovery would not bring any significant slacking of price hikes. Democrat Walter Heller from the University of Minnesota appeared to sum up the views of his colleagues on the board with a rhetorical question: "Recession, where is thy anti-inflationary sting?" Instead of halting the runaway rise in consumer prices, the decline seems merely to have kept the inflationary pressure bottled up and ready to escape at the first sign of renewed economic vigor.

While inflation has fallen back from the 18.2% annual rate hit last winter, TIME'S economists predicted that the rate of price increases would dip only to about 10% by the turn of the year or early in 1981, an alarmingly high base from which the economy will again begin growing. At best, the board predicted a 1981 year-end inflation rate of 9.4%. But any number of external shocks to the economy, such as big new oil-price jumps, a bad 1981 harvest or an excessively cold winter, could send prices leaping to far higher levels than that. The board's liberals fretted over the lack of an effective program of wage and price restraints by the vote-conscious Carter Administration to keep the pressure contained still longer; conservatives worried that the nation simply will not sit still for the three to five years of slow growth that may be necessary to halt inflation in any significant way.

Board members split sharply over the timing of the economy's eventual return to good health. There was also disagreement regarding just how buoyant or fitful the recovery would be. Most members forecast that the economy would either continue to decline or stagnate until the end of the year--this is in sharp disagreement with Commerce Department Chief Economist Courtenay Slater, who two weeks ago declared that the recession had ended in July or August. A minority of TIME'S economists anticipated that a modest drop would continue into early 1981.

Some figures released last week suggest that the economy is beginning to slow its rate of descent, if not to bounce back altogether. After six months of steady decline, industrial production in August rose 0.5% from the July level, while August's construction of new residential housing rose 12% over the previous month's depressed levels. Overall, preliminary statistics showed, in fact, that the contraction of the economy as a whole halted between July and September, as compared with the sharp 9.6% decline that had been registered between April and June.

TIME'S economists, however, argued that those are false signs of a rebound. Said Republican Alan Greenspan, the head of a New York-based consulting firm: "I would expect that the incipient recovery will stall within the next eight weeks." The economists generally predicted that U.S. business will be sluggish next year. The board's median forecast for 1981 anticipates growth of 2.7%, although individual predictions ranged widely. Republican Murray Weidenbaum, director of the Center for the Study of American Business at Washington University in St. Louis, forecast a relatively brisk 4% expansion, but independent Economic Consultant Robert Nathan projected an all-but-invisible expansion of only 0.25%.

The strength of the economy will depend to a large degree on actions of the Federal Reserve Board in the weeks ahead. By sharply curbing the flow of money and credit last winter, the Fed severely crimped the ability of the economy to expand. Interest rates leaped to record levels of 20% or more, and the nation pitched into recession. By spring, the sky-high cost of money was threatening to cause a severe slump; the Fed then switched course and began pumping money back into the economy. Since then the money supply has been on a roller coaster ride of weekly gyrations, with the nation's central bank struggling to smooth out and steady the growth of money.

Interest rates, which have been creeping up in recent weeks, are likely to continue rising, as the Federal Reserve attempts to remain within its 4% to 6 1/2% annual growth target for money. Thus just as the economy appears to be getting up off the canvas, these higher interest rates are likely to knock it down again. Said Republican Monetarist Beryl Sprinkel, chief economist for Chicago's Harris Trust and Savings Bank: "The interest-rate decline, which was getting under way and making significant progress, has been aborted." Greenspan predicted that the economy could not return to solid growth until mortgage rates declined to about 10%. He did not see that happening before early 1981 at the soonest. The cost of mortgages has fallen to 12% or so from last spring's peaks of as much as 16% in some states, but is starting to climb anew. This might result in a so-called double-dip recession or what Greenspan somewhat puckishly suggested might look like a "wobble-u," or "inebriated L," if laid out in a graph.

The board was equally critical of Presidential Candidates Carter, Reagan and Anderson for their failure to propose meaningful programs to combat the renewed inflationary menace. Heller approvingly noted that Anderson has supported the idea of a tax-based incomes policy whereby Government would give tax breaks to companies that hold down prices and to workers who settle for modest wage increases. There seems little likelihood, however, that any such program will become law any time soon. Said Economic Consultant David Grove: "I haven't heard the candidates come up with a program for dealing with inflation that is very credible." Added Democrat Joseph Pechman, director of economic studies at the Brookings Institution in Washington: "In this election year the message seems to be business as usual."

Members of the board were unimpressed by election-year proposals for America's industrial revitalization. Grove warned that there are no quick or pain less plans to restore health to such key industries as steel and autos. Said he: "It will really require working on a lot of fronts at the same time. This would include reducing expensive Government regulations, plus shifting the tax structure more in favor of savings and investment than consumption. But none of these things is going to produce fast results, and none of them is going to be easy to do politically."

President Carter's proposed Economic Revitalization Board, which will be headed by AFL-CIO President Lane Kirkland and Du Pont Chairman Irving Shapiro, was also viewed with skepticism. The group is supposed to get business, labor and Government to sit down together in a sort of tripartite arrangement and discuss their mutual problems. Said Weidenbaum: "What scares me is that when Big Business, Big Government and Big Labor get together, they lean on the little consumer." Nathan pointed out that close cooperation in the past between the steel industry and steelworkers resulted in high wage settlements and an antiquated industry that has difficulty competing with Japanese imports.

To most of the board's members, the biggest single weakness in the anti-inflationary approach of the two major candidates was the lack of a comprehensive, all-fronts assault on the many roots of rising prices. Summed up Nathan: "If we are simply going to rely on monetary and fiscal policies to try to tighten down inflation, it is a hopeless task. We must recognize the complexity of inflation and take genuine and effective steps, for example, to boost investment, scrap protectionist trade policies, eliminate agricultural price supports and substitute income supports for farm families, limit cost-of-living benefits for federal worker pensions and Social Security and intensify competition. Until we do those things, we will simply be running away from many of the base causes of inflation."

The U.S. economy has become deeply ensnarled in what the late Economist Arthur Okun called "the great stagflation swamp." Just when the economy may begin to pull out of recession, interest rates are likely to start up and inflation to take off again. That will push the economy back down into another period of slow growth or recession. With the underlying inflation rate now at about 10%, the way out of the swamp and onto solid ground, as TIME'S economists saw it, looks more difficult than ever.

--By Christopher Byron

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