IF CLINTON CAN'T PASS A MEASLY $16 BILLION PACKAGE...
Remember Albin Killat? He was the German diver who did a belly flop at the 1992 Olympic Games. Now picture President Clinton's first plunge into economic policy.
To be sure, Clinton's $16.3 billion economic-stimulus package was too small to deliver "jobs, jobs, jobs" in the first place. But his inability to get even this token gesture through Congress means that the President now has lost points in the game he was elected to win--the economy. This failure raises new policy uncertainties that could adversely affect the outlook.
For starters, Clinton's defeat is fueling disillusion on Wall Street. Although Congress is locked into the budget numbers it agreed to back in March, investors fear that the results of this summer's battle over the fiscal 1994 budget could be sharply different than what they had expected (page 22). In addition, the upcoming health-care proposals will be subject to the same Republican filibustering that killed the stimulus package. On both fronts, the GOP will lob grenades at the Administration's onslaught of new taxes.
The greatest threat to the economy from all this comes from the bond market. New uncertainty about long-run deficit reduction is making market players nervous. Long-term interest rates jumped on Apr. 27 after White House Budget Director Leon E. Panetta expressed discouragement about cutting the deficit in 1993.
The sharp decline in long rates earlier in the year, the result of Clinton's proposal to reduce federal red ink, contained far more stimulus than the President's fiscal package did. But now, new worries about Clinton's ability to make policy could keep long rates higher than the excellent inflation outlook would justify. In particular, the bond market knows that the health-care debate will be rancorous--and that the failure to contain health-care costs alone will jeopardize permanent deficit reduction.
For now, at least, President Clinton's political problems are his own and not the economy's. The latest readings show that manufacturing still looks buoyant, despite a sharp drop in March orders. The trend of employment costs continues to signal that inflation is under control. Most important, Household America is a little more confident, and consumer spending in April appears to be recovering from its March slump (charts).
The Johnson Redbook Report on weekly retail activity shows that sales through Apr. 24 were up a seasonally adjusted 2.3% from all of March. That is considerably stronger than the previous week's report.
In addition, sales of U.S.-made cars and light trucks in the first 20 days of April were running at annual rates of 6.6 million and 5.1 million, respectively. Both rates are well above the March levels. Combined sales in April are likely to hit the highest level in more than three years.
Another good sign from households is the April bounce in consumer confidence. The Conference Board's index rose to 67.7 last month from 63.2 in March. Still, the rise followed three consecutive declines, and the April level remains some 10 points below the December high, hit just after the election. Households still seem disillusioned after seeing their postelection hopes for the economy fade into one of the largest tax hikes in history.
Clearly, the additional taxes required to pay for the Administration's economic program are shaping up to be a heavy weight on consumer income--and the economy--in 1994. But in 1993, consumers seem more interested in spending it while they have it, and their behavior reflects an improving assessment of present conditions.
In April, people felt more positive about both current conditions and the outlook. What's more, consumers' assessment of their present situation rose to the highest level in two years. The fuel behind the rise in this component of confidence is slowly improving job growth. Over the past three years, this index has tracked private payrolls almost step for step.
Tax talk, Clinton's declining popularity in the polls, and fears of renewed congressional gridlock will continue to color consumer expectations--and thus confidence--this spring. But as long as payrolls keep expanding, consumers will increase their spending based on the present, not the future.
With the outlook for consumer demand looking a little better than the March numbers had suggested, manufacturing seems likely to hold on to the momentum it has picked up in recent months. Bad weather hardly seems to blame for the 3.7% drop in durable-goods orders in March, but the orders data are the most volatile of the government's numbers. A 60% plunge in aircraft orders, following a 122% surge in February, accounted for three-fourths of the overall March drop.
The trend of orders over several months is more important than any single month's blip. On that score, orders in the first quarter stand 3.5% above the fourth-quarter level, and they are 11.6% ahead of the year-ago reading (chart). Unless orders fall further in coming months, factory production seems likely to keep chugging ahead this spring.
As if dealing with the Republicans and the bond market weren't enough for Clinton, will the inflationary potential of rising labor costs bring a more restrictive Federal Reserve into the policy equation? After all, growth in the cost of wages and benefits seems to have bottomed out after 212 years of decline. Employment costs for private industry rose 1% in the first quarter. That kept labor costs increasing at a year-over-year rate of 3.5%, the same annual advance as in the fourth quarter.
The Fed, however, may not apply the brakes just because the days of slowing wage growth are over. That's because it is unit labor costs--not compensation--that fuel inflation. And the recent gains in productivity will keep unit costs from rising by very much this year.
Wages are the main reason for the steady growth in compensation. Pay increased 2.7% over the past year, not much different from the gains of the previous two quarters.
Pay raises may be a bit fatter now that job growth is firming. Last quarter, unions negotiated pay increases averaging 3.1% annually over the life of the bargaining agreement. That's a bit better than the 2.6% yearly raise won in the fourth quarter of 1992, although the gain is still below the 3.9% hike received by these same unions when they bargained three to four years ago.
Benefit expenses have also slowed, but they remain a trouble spot for businesses. These costs--including bonuses, vacation pay, and health insurance--rose by 5.6% in the year ended last quarter, up from 5.1% in the preceding quarter (chart).
The Labor Dept. said that bigger bonuses helped to boost benefit costs. The absence of those payouts means that benefits are rising by a smaller pace this quarter. In addition, Clinton's promise to control medical-care costs may stabilize the price tag for benefits later on.
However, revamping the U.S. health-care system has an even higher degree of difficulty than does the President's deficit-reduction plan. Already, the White House's trial balloons on how to finance universal health care have gotten low marks from the Republicans. And tax talk may further spook the bond market because more taxes in any form--from energy to value-added--could cause a blip in the inflation rate over the next few years even while economic fundamentals exert little upward pressure on prices.
Clinton must calm those concerns quickly because his economic policies will face an even tougher time if he doesn't have the backing of the financial markets. Indeed, as the President starts his twin battles on the budget and health-care fronts, he will be well advised to heed the lesson of Albin Killat's off-center dive: Make sure you have solid footing before taking the plunge.JAMES C. COOPER AND KATHLEEN MADIGAN