The Economy at Mid-Year

July 06, 1991

The U.S. economy at mid-year shows increasing signs that the recession has bottomed out and a weak recovery has begun. Factory orders are up, the average workweek is lengthening, consumer confidence shows cautious optimism and corporate profits are on the way up. Yet, by postwar standards, this will be no dramatic bounce-back. Gross national product and individual income are expected to rise at a rate only half as large as normal.

By far, the largest drag on the economy is the huge pile-up of debt -- private, corporate and public -- that occurred during the 1980s. Combined with severe troubles in the financial sector, it creates a real shortage of capital that will moderate the recovery -- if, in fact, a recovery occurs. In addition, states and local subdivisions are under great pressure to increase revenues to make up for a decline in funding from a federal government so awash in interest costs that its share of GNP is still growing larger. The result: higher taxes overall at the expense of individual spendable income.

A year ago, the definition of a contrarian was an economist who predicted a recession. Most observers, in defiance of the law of gravity, thought the credit-card prosperity of the Reagan era would go on forever. What went up didn't necessarily have to come down. Today, common wisdom decrees that what goes down has to go up. There are contrarians out there, however, who feel the current spurt of mild optimism is nothing but a bear trap, with a renewed downturn or just plain, flat, muddling along at a low level the more likely prospect.

Take employment. When the latest figures appeared yesterday, most of the experts were surprised to learn that the number of jobs actually fell by 50,000 in June after a confidence-building rise of more than double that number a month earlier. In tandem with the longer workweek also reported, the figures presented a picture of manufacturers stepping up output but hesitant to begin hiring in the current climate.

Persistent uncertainty, unfortunately, has contributed to a general lack of will in Washington to tackle the economic problems confronting the country. Probably not until after the 1992 election will anything substantive be done to increase savings and investment or alter a tax system that encourages consumption rather than production. In the interim, Americans should ask how their political leaders propose to reverse trends that threaten the nation's economic position and its ability to exert global leadership.

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