The Economy Which Way Is Up?

By John Greenwald

After the longest U.S. slump since the Great Depression, the first signs of recovery have begun to sprout like early spring blossoms. Spurred by a decline in interest rates, Americans have been snapping up houses and heading off to shopping malls in growing numbers. Tightfisted bankers have begun writing new loans, and some companies are seeing an encouraging increase in orders.

But hold the applause, please. A combination of high unemployment and low consumer confidence seems certain to make this America's weakest rebound since World War II. With the economy stuck in slow motion, a new round of layoffs could plunge the U.S. right back into recession. And this year there is even more at stake than jobs and profits: the rate of recovery could very well decide the presidential election in November.

No one is more mindful of that fact than George Bush, who has presided over the puniest four-year growth rate since Herbert Hoover. The Administration is naturally hoping for a solid rebound. But after virtually ignoring the recession last year, Bush now shies away from making any rosy remarks that could haunt him in November. "When you say the recession is over, the public expects the economy to be back in good shape," observes a White House official. "Clearly, that is not the case, and it will not be the case for quite some time."

The Democrats are in a no less awkward position. They cannot openly root against a recovery, although a sharp upturn could dash the party's election hopes. Both Bill Clinton and Jerry Brown, therefore, must concentrate on attacking Bush's economic stewardship no matter how the recovery develops. "Clinton entered this race because the country has suffered for 11 years without an economic strategy that would make us richer over the long term," % says Bruce Reed, a deputy campaign manager for the Arkansas Governor.

A spate of reports last week traced the powerful riptides that continue to buffet the economy. The Commerce Department said the gross domestic product grew at a microscopic annual rate of 0.4% in the fourth quarter last year, only half as much as the previous estimate. The job picture darkened as new unemployment filings rose by an unexpectedly high 15,000 claims, to 447,000 in mid-March. And orders for big-ticket durable goods ranging from turbines to battleships fell 0.1% in February, after rising a sprightly 2.5% in January. There has been good news as well: purchases of existing homes jumped 9.3% in February, while retail sales rose 1.3% the same month.

The lingering gloom reflects woes that have been building for years and will take years to dispel. "The restructuring of corporations, heavy debt loads and the perceived lack of leadership have been bothering the consumer, and a lot of this hasn't changed much yet," says Donald Ratajczak, an economist at Georgia State. Forecasters thus predict an anemic 1.5% growth rate for 1992, far below the robust 5.5% average for the first year of past turnarounds. Such sluggishness would scarcely reduce unemployment, which stands at 7.3% and could climb even higher as the Pentagon demobilizes the armed forces and slashes military contracts.

Nowhere has the economic engine been sputtering more loudly than in Detroit, where car sales had climbed 3% during the first two months of this year only to slide 6.9% in the period from March 11 to March 20. "Obviously, this is not a boom," says Thomas Webb, chief economist for the National Automobile Dealers Association. Yet the modest overall pickup has left the Big Three with dwindling backlogs of unsold cars and busier production schedules. Ford plans just 12 weeks of plant shutdowns to trim inventories in the second quarter, compared with 36 weeks for the same period a year ago. The downtime could be extended, though, if buyers stay fickle. Says a Ford analyst: "If we had three or four bad weekends in a row, we'd have to adjust our schedules again."

That remains a strong possibility, since many economists doubt that the recovery will have much staying power. They contend that unseasonably warm winter weather artificially boosted housing and stimulated consumer spending. At the same time, they note, Administration gimmicks like the acceleration of federal payments to veterans and health-care facilities will taper off sharply this fall. "Most likely the economy will worsen again later this year or in early 1993," write David Levy and S. Jay Levy of the Jerome Levy Economic Institute at Bard College. "Unfortunately, the positive effect of these stimulative actions will be short-lived and give way to negative effects in 1993."

Yet the economy has some real strengths that could bolster the recovery. Inflation is running at a modest 3% pace and shows no signs of heating up anytime soon. Consumers and companies have seized the chance to lighten their debt loads by refinancing them at lower interest rates. Companies have also charged into the bull market for stocks to raise cash and pay off IOUs. Corporate America sold a record $55 billion worth of new shares last year to help clean up its balance sheet.

Some economists fear, though, that the boost from falling interest rates may already have peaked. Homeowners who refinanced their mortgages at rates that dipped below 8.25% in January collectively stand to save up to $15 billion in interest charges this year. But as mortgage rates have climbed back over 9%, the volume of refinancing has fallen off sharply. At the same time, applications for first-time mortgages have tumbled nearly 15% since February. "The biggest threat to the recovery would be a surge in interest rates," says Lynn Michaelis, president of the National Association of Business Economists. "That would nip the recovery right in the bud."

With the outlook so tenuous, consumers have mixed emotions about spending their money. "Everything seems very unsettled right now," says Carol Jeanes, 38, who is publications director for the Houston Association of Realtors. "Everyone I know is jittery. It's hard to feel that things are better when your friends are getting laid off and having to readjust their whole careers." Despite her concerns, though, Jeanes is shopping for a new house because of low interest rates.

Many businesses are likewise waiting impatiently for the upturn to reach them. "The recovery -- yeah, they announced it the other day," scoffs Tom Barrows, 57, who runs an office-supply shop in Atlanta. "It was good they told me, because I didn't know. I'm not seeing any turnaround or new confidence." Concurs Robert Deck, 48, a Michigan steel salesman: "Nobody's carrying any inventory. If you get an order, it's just enough to get them through that job."

In once golden California, where unemployment reached 8.7% in February, workers are reeling at the prospect of defense cuts that could eliminate as many as 140,000 jobs by 1995, or nearly two-thirds of the remaining aerospace labor force. That would be in addition to 71,000 mechanics, engineers and managers who were already laid off over the past three years. General Colin Powell, Chairman of the Joint Chiefs of Staff, described the grim outlook last week during a visit to Los Angeles. Said he: "Everyone needs to wake up and smell the coffee. I'm telling my folks at the Pentagon, 'Guys, we are having a hell of a fight this fiscal year, but it is nothing compared to what is coming next year.' "

While defense contractors suffer, small and medium-size firms that have vigorously cut costs could be in for recovery-generated profits. "I am more optimistic for middle-market companies than for Big Business," says Art Nemiroff, managing partner of the Los Angeles branch of the consulting firm BDO Seidman, whose 2,200 U.S. clients include retailers and manufacturers with sales of up to $100 million. "Most of our clients were able to downsize quickly," Nemiroff adds. "They are operating from a leaner and meaner position today."

Yet relentless cost cutting by everyone from mom-and-pop businesses to such corporate giants as IBM and General Motors could undermine the recovery. While workers who lost jobs in previous slumps often came right back when things looked up, much of the current downsizing has been permanent. "All kinds of companies have got new religion about cost control," says William Melton, chief economist for Minneapolis-based IDS Financial Services. "And this will really have an impact on job creation." Thus many middle managers and blue- collar workers alike could have little chance of returning to work unless they change careers.

Declining exports could further hamper Americans' job prospects. While U.S. sales abroad last year provided most of what little strength the economy showed, slumps in Japan and Germany threaten to cut into that foreign business. Moreover, newly cautious Japanese companies seem reluctant to continue making job-creating investments in U.S. factories and real estate, and have already begun to withdraw from the Treasury markets that finance the U.S. deficit. "No more Japanese investors are coming in," observes Georgia State's Ratajczak, "and that's a problem."

Neither the White House nor Congress has begun to offer serious solutions to the economy's long-term troubles. On the contrary, both branches have permitted the budget deficit, which soaks up savings and hinders investment, to balloon to a projected $400 billion this year. And while the Administration once predicted that the deficit would disappear by 1996, it now foresees at least $200 billion worth of red ink for the next five years.

But it is not the long-term factors that will affect this year's political equation. When voters go to the polls in November, they are likely to remember Ronald Reagan's famous 1980 question: "Are you better off than you were four years ago?" The answer to that, more than anything else, may determine which lever they will pull.

CHART: NOT AVAILABLE

CREDIT: GRAPHICS BY JOE LERTOLA

CAPTION: Retail Sales

Housing starts

30-year mortgage rates

Unemployment

With reporting by Bernard Baumohl/New York, Sylvester Monroe/Los Angeles and Richard Woodbury/Houston