Is the recession bottoming out?
The latest survey by Blue Chip Economic Indicators, released Friday, reports that the consensus forecast of the 50 economists polled is that real gross national product, after dropping at annual rates of 1.6 percent and 2.8 percent in the last two quarters, is flattening and will rise slightly - by six-tenths of 1 percent - in the current April-June quarter.And a new survey of 500 bank examiners and bank liquidators indicates that the housing slump is ending.
Yet some economists at major banks and industrial corporations contend that the recession is not only still here but is even widening. Joseph G. Carson, the Chemical Bank's chief economist, told the bank's international advisory board earlier this week:
"In my opinion, rather than ending, there are more signs that the recession is broadening domestically, encompassing not only the consumer sector but also capital spending and government spending." Globally, he added, "recessions continue in Canada and the United Kingdom, and early signs of recession are now present in continental Europe."
Carson's major concern about the American economy is that as a result of the debt buildup of the 1980s and the big rise in interest costs to a record level of 30 percent of cash flow, many concerns have been starved for cash and, even before the recession began last July, had been suffering "profitless prosperity."
Hungry for cash, they have resorted to selling goods at distress prices, liquidating inventories, cutting capital spending and laying off workers and managers.
And Carson sees more adjustments ahead as profit margins continue to shrink, manufacturers' inventories remain high and, in some retail sectors, order backlogs continue to decline. Also, he said, "export orders may remain soft for several more months."
Carson also reported on the views of other business economists at last week's meeting in Washington of the technical advisers to the Business Council. "Without exception," he said, there had been a "significant swing" toward pessimism since the economists' mid-February meeting.
Auto industry representatives said business was "very soft" with no "signs of a pickup in sales." There were also pessimistic assessments by representatives of the capital goods sector, chemicals, textiles, primary metals and consumer durables.
Yet, Carson reported, "industry representatives continue to expect a second-half recovery." He suggested that these representatives were guilty of "calendar analysis," based on the belief that because recessions historically have lasted about one year, this one should be over by midyear.
But he held that individual recessions vary widely in duration and do not expire because of old age. Rather, he said, they end as business makes its financial adjustments and government monetary and fiscal policies kick in to lift the economy out of recession.
"How much worse the recession gets," Carson said, "will depend on the pace at which we can unwind the financial imbalances which triggered this recession and, importantly, the monetary and fiscal policy responses which follow." Those responses up to this point, he argued, have been "at best neutral."
Last fall's budget agreement between the administration and Congress raised personal taxes by more than $25 billion for 1991, and 26 states increased taxes by $10.3 billion. The Fed has been moving to bring down interest rates, including last week's half-point cut in the discount rate to 51/2 percent and a quarter-point cut in the target for the federal funds rate to 53/4 percent. But Carson held that real corporate borrowing costs had not come down enough.
His conclusion was that the recession would last another five to six months, and that during that period the roots of recovery, in the form of lower interest rates, would be taking shape, "setting the stage for a solid recovery in 1992 and beyond."
Before the recession is over, he is looking for at least one more cut in the discount rate, to 5 percent, and a federal funds rate of about 51/4 percent. He is far from alone in his view that Fed policy should ease further. Richard A. Debs, advisory director of Morgan Stanley International and a former official of the Federal Reserve Bank of New York, said the Fed "has leeway now to go further."
And David D. Hale, chief economist of Kemper Financial Services Inc., said that while the economy might be stabilizing, the recovery was likely to be so modest as to have no impact on unemployment or industry's rate of using capacity.
"The critical issue," he said, "is the economy's growth rate vis-a-vis the potential growth rate of new supply and the slack created by the recession."
If the second-half recovery is too weak, it will still feel like recession, especially to the jobless, the cash-short and debt-laden consumers and businesses threatened with falling profits or bankruptcy. And there will be a danger of a lurch into a secondary recession in 1992 or '93 - like the double-dip recession of 1979-80 and 1981-82. A stronger Fed push is still needed.