THE THIRD QUARTER IS FULL OF FIRST DOWNS
If you stare at the 1.3% figure for first-half economic growth too long, your vision of the second half is bound to get blurred. Many of the third-quarter numbers clearly suggest that the U.S. economy's disappointing past is not prologue. In fact, second-half growth in the range of 3% to 4% looks increasingly likely.
The growth leaders in the third quarter are coming into sharper focus. Consumers are spending at a healthy clip, despite their widely voiced pessimism. Business has increasingly bullish plans to invest in new equipment. And just when you might have thought it wasn't going to happen, homebuilding and housing demand finally are responding to historically low interest rates.
Also, overall industrial production--and manufacturing output especially--are showing definite signs of a pickup, even though factory payrolls still are shrinking and the trade gap continues to yawn.
Consider the latest data: Consumer spending through August is rising at an annual rate of about 3.5% from the second quarter. Industrial production is up 2.4%, with big auto-led gains on tap for the fourth quarter. Capital-spending plans for the second half are nearly as robust as they were in the first. And in August, housing starts jumped to a 31 2-year high, while new jobless claims fell to a four-year low (charts). That's hardly a picture of a struggling economy.
Many corporate economists aren't convinced. The latest forecast of the National Association of Business Economists, released during its Sept. 19-22 conference in Chicago, calls for average annual growth of 2.5% in 1993, with growth of barely 3% in the second half.
The NABE is none too ebullient about prospects for 1994, either. The forecasters expect 2.8% growth next year, with consumer-price inflation of 3.3%, up from a projected 3.2% this year. The standout number in the forecast, though, is the unemployment rate. The economists believe that joblessness will end 1994 at 6.6%--little changed from the current level of 6.7%.
One reason the NABE gives for its modest growth forecast is the belief that lower interest rates will not provide much stimulus to rate-sensitive sectors. That must have been prior to the report on August housing starts. From all recent indications, housing is now ready to provide the economy with a big lift.
Housing starts jumped 7.8% in August, about twice the general expectation, to an annual rate of 1.32 million--the most since February, 1990. The key single-family sector led the gain with an 11% increase to 1.18 million, the highest level in six years. Permits to begin new construction also posted a solid advance.
Cheaper mortgages and better weather fueled the gains. Starts rose strongly in all regions, except in the Northeast, where they fell. New building even rebounded by 15.6% in the West, where it has been suffering enormously.
The strong numbers on homebuilding echo the increasingly optimistic anecdotal reports from lenders and contractors. By early September, mortgage applications for home purchase had jumped some 35% from June, according to the Mortgage Bankers Assn.
Also in September, 44% of the builders surveyed by the National Association of Home Builders rated current sales activity as "good to excellent," the most in nearly five years. Moreover, the number who expect "good to excellent" conditions for the next six months jumped to 48%. That was the best assessment in nearly eight years.
If housing is now kicking in, the lift to the economy will be broad. Spending on home-related goods, such as furniture and appliances, always picks up when housing does, and that lifts factory orders and output.
In fact, retail buying already may be seeing some benefits. Seasonally adjusted sales at retailers and discount stores rose a strong 2.6% for the first three weeks of September, compared with August, according to the Johnson Redbook Report. And auto sales early in the month held up, matching the August level.
One reason consumers are in a buying mood is because fewer households are in dire financial straits. Consumer loan delinquencies--payments that are more than 30 days overdue--fell sharply in the second quarter, according to the American Bankers Assn. Delinquencies hit a nine-year low, taking the level back to where it was prior to the big debt buildup of the 1980s.
Rising consumer spending appears to be feeding back to manufacturers. After languishing this spring, total industrial production rose 0.2% in August, its third gain in a row. Factory output was up by 0.4%, and the overall operating rate remained at a noninflationary 81.8%.
Output so far in the third quarter is increasing at a 2.4% annual rate. That's a bit better than the 2.1% advance in the second, and largely reflects the weather-related surge in utility use over the summer. Factory output is up at a 1.3% pace in the first two months.
Production of business equipment remains strong. Output rose 0.7% in August and is 9.1% above its year-ago pace. Offsetting that strength is the continued decline in defense output as well as the recent drag from auto and truck production.
Auto assemblies have fallen for four straight months, but you can't blame slow car sales. Supply bottlenecks related to the Midwest floods caused some cuts. More model changeovers than usual this year resulted in other shutdowns. In fact, dealers report firm demand, but skimpy inventories are limiting sales of popular lines.
Heading into the fourth quarter, though, Detroit is shifting into high gear (chart). Auto makers plan to build cars and light trucks at about an 11.5-million annual rate this quarter. If carried out, that would be the best output performance in five years. It clearly will give a boost to factory activity--and economic growth.
That would be a godsend for manufacturing, which is getting pummeled by the one-two punch of America's deteriorating foreign-trade position. Exports are growing more slowly, as imports wash ashore in droves.
In July, the merchandise trade deficit shrank to $10.3 billion from the stunning $12.1 billion gap in June. Exports dropped 1.5%, to $37.1 billion, the fifth decline so far this year. Imports fell 4.6% in July, retracing only part of their 5.1% jump in June.
Some of the July import drop was probably the result of retailers paring down their inventories. Stores cut their goods on hand by 1.3% in July, with a 4.9% fall in car inventories. Imports of consumer goods dropped 2.7% in July, while foreign-car shipments plunged 9.7%.
However, with U.S. demand rising, imports will probably rebound in coming months. And at the same time, export growth will struggle to pick up steam, hampered by either recession or slow growth abroad.
Price-adjusted exports for the past year have risen only 5.7%, compared with the 12 months ended in July, 1992. Imports, on the other hand, have skyrocketed, jumping 11.5% (chart).
The diverging trends in exports and imports suggest that the U.S. trade deficit will total more than $100 billion this year, which could result in the widest trade gap since 1989.
Trade with recession-wracked Europe has been especially dismal. So far this year, the U.S. trade surplus has shrunk to just $893 million, an enormous plunge from $7.4 billion in first seven months of 1992. With solid economic growth on the Continent unlikely until 1994, American exporters will face a tough time increasing shipments across the Atlantic.
However, according to the forward-looking indicators, healthy domestic demand is propelling the U.S. economy to faster growth in the second half after a weak first half. Of course, as forecasters well know, foresight may not be 20-20. But the latest data say that hindsight simply shows the wrong picture.JAMES C. COOPER AND KATHLEEN MADIGAN