The psychology of uncertainty buffets economy


September 12, 1990|By PHILIP MOELLER

With the unemployment rates in Maryland and Baltimore reaching two-year highs in July, it's beginning to look as if the area's economy is finally beginning to weaken, confirming many months of anecdotal evidence that a slowdown had arrived.

It's still true that we're better off than most folks. Maryland's unemployment rate of 4.5 percent remains a full percentage point below the national jobless rate. Baltimore's unemployment rate of 7.5 percent is not so easily rationalized, although the metropolitan area's rate is a more comfortable 5 percent.

A pinch has yet to be felt in Howard County (2.9 percent) or Montgomery County (2.7 percent -- the state's lowest jobless rate), and the much-feared "collapse" of the Washington real estate market has yet to be reflected in any serious decline in the surrounding Maryland counties, where unemployment was still only 3.4 percent in July.

Yet, these were "pre-Iraq" rates. Business conditions may have since improved for some price-gouging gasoline and fuel-oil dealers. And the folks at Survival Technology in Bethesda are working long hours these days. They are the makers of the military's only source of self-injection kits that combat the effects of nerve gas.

But things aren't looking up for most other businesses. And though overall jobless rates remain relatively low in Maryland, the sobering fact is that business managers live and die with the rate of change.

Even a big economy is a tough place to do business if that economy is shrinking.

It's especially frustrating when the causes of a downturn stem as much from psychological factors as from fundamental weaknesses that directly reduce business activity.

For years, of course, many experts have marveled at how the U.S. economic recovery could sustain itself with no visible means of support. Basic industries were not booming, foreign trade was not a source of much domestic growth, interest rates were not declining all that much, and the federal spending deficit was not getting any smaller.

Job creation, however, told a different story. Employers continued to create positions, unemployment stayed low, and wage inflation did not become a serious problem. It's true that not very many of these new jobs were for rocket scientists or highly compensated unionized workers in major industries.

As a result, the actual buying power of typical workers declined for much of the 1980s. As individuals, we are decidedly worse off than we were 10 or 15 years ago. As households, however, many of us have compensated by sending multiple breadwinners to work each day. And as an economic system, we continued to grow, at least based on measurements such as unemployment and gross national product.

Throughout the 1980s, psychology seemed to be on our side. The surge of investment markets both reflected and fueled such positive thinking. But with the Dow Jones average of 30 industrial stocks near the superheated (and overvalued) level of 3,000 earlier this summer, with the government's budget situation in a mess and with dying savings and loans threatening to absorb hundreds of billions of dollars in public money, we were vulnerable to the kind of unpleasant surprise touched off by Saddam Hussein's invasion and takeover of Kuwait.

Despite tales about how much capitalists benefit from the economic stimulus of war, the immediately reality is that business suffers from the uncertainty and instability of the latest Mideast crisis.

Economic confidence is undermined, and so is that crucial psychological element of human motivation, whether it's consumer, investor or employee confidence. The bottle that was so comfortably half-full now seems dangerously half-empty.

The higher oil prices that have come with the embargo of Iraqi and Kuwaiti oil provide a fertile medium for nurturing a negative economic outlook. I don't mean to minimize the impact of higher energy prices as a drag on economic growth. But I'd suggest that it's the damage done to our collective economic psyche by the Mideast uncertainty that has the potential to translate an economic inconvenience into a recession starter.

Frankly, in percentage terms, oil prices will not be rising by anything near as much as they did in the 1973-74 period or again in the early 1980s. Those earlier increases have been linked with subsequent recessions, but there were other major problems in those periods as well.

There were crop failures that produced double-digit inflation in food prices in the mid-1970s. Inflation and interest rates were already major problems in the early 1980s without oil price increases. The Federal Reserve Board's anti-inflation efforts might well have been needed anyway, bringing us the 1982 recession regardless of the Organization of Petroleum Exporting Countries.

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