The Economy: Crawling Out Of the Slump

By John Greenwald

Not for months has Alan Greenspan been so downright bullish about the U.S. economy. Speaking last week in Osaka, Japan, the normally dour Federal Reserve chairman said he saw "clearly encouraging" signs that the recession is ending and mounting evidence of a "stronger-than-expected recovery." But back at home, hardly anyone else felt it. Wary Americans seemed a long way from embarking on a spending spree. "I used to go into a store and say, 'I want that,' and not even ask how much it cost," says Liane Adduci, an ad- agency executive in Chicago. "Now I'm much more conservative." The unlikely but nagging chance of a layoff has kept her cautious, Adduci says. "I couldn't find a new job for eight months to a year," she explains. "I don't know anyone who doesn't live from paycheck to paycheck."

Such misgivings threaten to turn the recovery, when it arrives, into a painfully weak one. Despite upticks in home sales and factory orders that indicate the 11-month-old slump could end this summer, economists say the ) rebound will be far less robust than any of the eight other U.S. recoveries since World War II. The outlook is bleak largely because the 1980s debt binge still hobbles companies and consumer spending and makes banks unwilling to lend. At the same time, the $318 billion federal deficit handcuffs Washington's ability to stimulate business by cutting taxes and boosting spending -- tactics that helped the U.S. come roaring out of previous slumps.

A healthy sign of a rebound came last week when the government delivered its latest unemployment report. The figures showed that joblessness rose to 6.9% in May, up sharply from 6.6% in April, but hopeful economists turned their attention to a companion statistic indicating that U.S. companies created 59,000 new jobs last month. That broke an 11-month string of job losses that began last July. (The number of jobs can increase even as unemployment is rising because the two figures come from different Labor Department surveys that are often at odds.) Says Allen Sinai, chief economist for the Boston Co. Economic Advisers: "A strong hint that the recession has just about ended or may have already ended showed up in the May jobs report." But he adds, the economy "is crawling out of the recession, not bursting out of the gate."

Many forecasters predict the economy will grow less than 3% in the 12 months that follow the recession, compared with a vigorous 6% average for previous postwar turnarounds. "The consumer won't feel any sense of recovery until December or early next year," says Susan Sterne, president of Economic Analysis Associates in Stowe, Vt. Concurs Wall Street economist Lawrence Kudlow: "This recovery just isn't going to have much torque."

In fact, the economy seems to be headed for a return to the same type of feeble expansion that saw the GNP rise just 2.5% in 1989 and about 1% in the first half of 1990, before the downturn took hold. "The recession is just one part of the big picture of sluggish growth since 1989," says Sinai. "It should be seen in that light."

Weak growth would bring an anti-climactic end to a recession that began last July and worsened sharply after Saddam Hussein's forces invaded Kuwait in August. In the anxious weeks that followed, U.S. consumer confidence plunged to levels not seen since the 1981-82 slump before rebounding on the strength of the swift American-led victory in the gulf war. But gauges of consumer confidence began falling as soon as the euphoria wore off and have tumbled in each of the past two months.

If the recession does end this summer, it would be similar in length to other postwar downturns, which lasted an average of 11 months. Despite the roller coaster of consumer emotion, however, strong U.S. exports have helped make the latest business contraction relatively mild. As measured from the third quarter last year, total U.S. GNP has so far dropped about 1.1% after adjusting for inflation, compared with an average decline of 2.7% for other slumps since World War II.

Some consumers are starting to emerge from their bunkers. In a TIME/CNN poll in April, 30% of adults surveyed said they viewed the economic slump as the No. 1 problem facing the U.S. But in a TIME/CNN survey taken last week, the figure had slipped to 17%.

After months of decline, the housing market is coming back cautiously, which has positive effects on other parts of the economy. Spurred by a drop in interest rates that trimmed the average cost of conventional home mortgages from 10.1% a year ago to as low as 9.25% last February, sales of new and existing homes have climbed for three straight months. That has brought a measure of financial relief to developers and homeowners whose properties were glutting the market. The rising demand helped reverse a falling trend for U.S. home prices, pushing the median price of existing homes to $100,200 in April, up 4.7% from the same month a year ago.

Yet commercial real estate remains a disaster area, with largely vacant office towers bristling from urban landscapes across the U.S. "The real estate industry is stuck in the worst recession we've ever seen," says Neil Bluhm, co-founder of Chicago's JMB Realty Corp., which manages more than $20 billion worth of property. "There simply isn't any capital coming into the industry today. There will be absolutely no new construction commitments until, maybe, 1995."

Unlike commercial developers, U.S. manufacturers have been shaking off their torpor as purchases of everything from steel to refrigerators have begun to pick up. Orders for U.S. factory goods climbed a healthy 1.8% in April, their first gain since last October.

After months of steep payroll cuts, some companies may be ready to hire workers again. Milwaukee-based Manpower Inc., the largest U.S. temporary- employment agency, said 22% of 15,000 corporate executives surveyed intend to expand their work forces this summer, while 10% plan new layoffs.

Despite the stubborn overhang of consumer caution, cash registers have begun to ring more briskly at department stores and other big retail outlets, which were hard hit by the slump. In the first major sign that shoppers are returning, 13 of the top 20 U.S. retailers reported that sales last month increased over May 1990 levels.

Some parts of the U.S. remain deeply mired. New England, where the slump arrived more than a year ago, has lost 200,000 jobs since last July, a 3.2% decline. Because the scars run so deep, economists predict that any rebound in New England will trail a recovery in the rest of the country by at least six months.

Even California could have a tough time shrugging off the slump. Cuts in defense spending have hurt the crucial aerospace industry, prompting state economists to predict that unemployment in the Golden State may average 7.6% this year. For Californians like Peter Perkins, a Los Angeles recording engineer, the evidence of an upturn has been bittersweet. After a radio production company laid him off in January, Perkins took two part-time jobs to meet the payments on his boat and a condominium investment. Last week he landed a new full-time position, but at a salary 25% below his old one. "I feel optimistic now about an upswing," says Perkins, "but there's been a shake-out in salaries. It's put the ball in the employer's court."

Many industries that are particularly sensitive to cyclical swings in business activity are hard pressed to notice any improvements yet. The hotel business has suffered deeply as such corporate giants as IBM and AT&T have slashed their travel budgets to hold down costs. "Our company logo ought to be SURVIVE TILL '95," says Darryl Hartley-Leonard, president of the Hyatt chain. "We cannot assume that this is just the typical business cycle of an American recession. In my 27 years in the business, I've never seen anything like this."

Many executives are adopting a show-me attitude. Says William Weiss, chairman of Ameritech, a Baby Bell phone company that serves five Midwestern states: "Despite what the Fed chairman says, I don't sense that business feels any strong sense of recovery. The government may have to play the role of cheerleader, but I wouldn't be as optimistic. We still have deep liquidity and credit problems that make it increasingly difficult for businesses to finance their way back."

The heavy debt load weighs on every sector of the economy from consumers to the Federal Government. Burdened by overzealous borrowing, more than 60,000 companies with liabilities totaling a record $64 billion declared bankruptcy last year. The pace has quickened in 1991 as firms with liabilities of $34.6 billion failed in the first four months alone. Last week the city of Bridgeport, Conn. (pop. 142,000), became the largest U.S. municipality ever to declare bankruptcy when it filed for protection from creditors after failing to find a politically acceptable way to close a $12 million budget gap.

Meanwhile, bankers laden with bad credit have remained reluctant to make new loans. That has helped perpetuate a credit crunch that began last year when bank regulators tightened loan standards to avoid a repeat of the savings and loan fiasco. Even the Fed's lowering of interest rates in recent months has scarcely encouraged bank lending to pick up. Asserts Hugh Johnson, chief economist for First Albany, a securities firm: "More than at any time in the past, banks are dragging their feet."

Another threat to the recovery is a slowdown in the world economy, which could take the steam out of U.S. exports. Policymakers in Germany and Japan have been deliberately restraining their economies by raising interest rates to keep inflation in check. Analysts on the staff of the European Community recently estimated that the economies of the group's 12 member nations would grow just 1.25% this year, down from 2.7% in 1990. Says Paul Horne, chief international economist for Smith Barney: "Near recession is how we describe the global economy today."

One world leader who appears to take a hands-off attitude toward the U.S. recession has been George Bush. "The Administration is irrelevant to economic policy," charges Barry Bosworth, a senior fellow at the Brookings Institution. "There's nothing they can do, and they don't matter. There is no such thing as fiscal policy in the U.S."

Yet Bush is cheerleading, if not tinkering. He quietly summoned 10 executives from companies as varied as General Mills and Apple Computer to the White House last month for a private chat about the recession. Said a CEO who took part: "There was a sense that the precipitous free fall in the economy was coming to an end, or may already be over. People are anticipating that there will be a rise off the bottom. But that is a hell of a long way from getting back to robust growth levels." From all indications, the rebound will be perfectly characteristic of everything else about the '90s: no instant gratification, just a long steady slog.

With reporting by Bernard Baumohl/New York, S.C. Gwynne/Washington and William McWhirter/Chicago