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Cover Story: COMMENTARY
THE ECONOMY IS GAINING STRENGTH: LET IT BE
Is it time for government to push the panic button and give the economy a jolt of fiscal stimulus?
Not yet. The odds that the U. S. will slip back into recession are low: Falling interest rates, lower inflation, and rising exports should keep the recovery going. What's more, the U. S. is making the long-awaited switch from a consumer-oriented economy to one driven by investment and exports. That change, crucial for U. S. competitiveness, could be aborted if panicky politicians pump up consumption to get the economy going again.
No question, the next six months or so could be uncomfortable. Ruing last summer's optimism, most forecasters now see slow growth at best through next spring. Unemployment, now at 6.8%, may not fall until well into 1992. So it's understandable why President Bush and other incumbents may get edgy as they look forward to next November's election.
SPRING THAW. Still, there's little evidence that the economy is actually contracting. Industrial production and employment are running flat -- but they're not dropping. And the banks seem to be slowly mending. "The economy is not exhibiting any of the cumulative unwinding" that would signal a renewed downturn, says Stephen S. Roach, senior economist at Morgan Stanley & Co.
Indeed, the Federal Reserve's campaign to cut short-term interest rates is finally showing results. The money supply is growing again, indicating that borrowers are having an easier time of it. Domestic nonfinancial debt, except for federal borrowing, rose at a 5.6% annual rate in September, its biggest gain since June, 1990. And October housing starts jumped by 7.3%, to their highest level in nearly a year. The Fed likely has done enough to keep the recovery rolling. Typically, lower rates take six months or more to boost the economy. In other words, the full stimulus from the Fed's last cut in interest rates, on Nov. 6, won't register until spring. "Monetary policy has done enough to facilitate the expansion," says Mickey Levy, chief economist at CRT Government Securities Ltd.
Long-term interest rates should drop, too, as inflation continues to subside. With the core rate of inflation now heading below 4%, the interest rate on 30-year Treasury bonds could drop as far as 6%, from the current 7.9%. A rate that low would surely start filling order books for such long-term investments as capital equipment.
There's also good news on trade. Exports are up 10% over last year. They should keep rising in 1992 as the global economy expands and demand builds. Combined with lower interest rates, that augurs more confidence among U. S. consumers and businesses.
In the short run, none of this is likely to relieve pressure on Washington to do something, anything, to get the economy growing again. But an attempt to boost consumer demand with tax cuts or some other federal program would be a bad mistake: It could reignite the inflation that has been painfully squeezed out of the economy. Even partial victories for price stability should not be given up so easily.
SKEWED PERCEPTIONS. Encouraging consumption would surely accelerate the recovery. But it could depress the U. S. economy's competitiveness. As many economists and executives have advocated, the U. S. is becoming more like Japan and Germany by emphasizing investment over consumption. In the past four years, business investment, minus commercial real estate, has accounted for a steadily rising part of the economy. Thanks largely to spending on computers, investment now constitutes 11.5% of gross national product. That's the biggest share in decades.
But if Washington were to encourage a consumer-led recovery, all these gains could be undone. Business investment and exports would compete for credit against housing, autos, and consumer imports. The U. S. could again be stuck in that '80s nightmare: Borrowing hugely from abroad to finance monster trade deficits.
Curiously, this may be one time when paralysis in Washington works in favor of sound economic policy. The U. S. has paid the price for low inflation and lower interest rates. Now, it's time to sit back and see the benefits come home.Michael J. Mandel