The '92 surprise: economic recovery

Stephen S. Roach

February 11, 1992|By Stephen S. Roach

THINK BACK to the mid-1970s. The U.S. economy was supposed to have been beaten into lasting submission by an oil shock that launched the Great Inflation.

Then, in the early 1980s, sky-high interest rates created fear of a permanent era of darkness.

In both recessions a crescendo of doom came almost precisely at the moment when revival was at hand.

Forgotten in those deep moments of despair was the time-worn magic of the American business cycle.

That same lapse of memory now seems to be afflicting President Bush and Congress as they seek remedies to heal the economy.

Alas, we never seem to learn.

As in all recessions, this time it is different.

The service sector, the engine of the two previous recoveries, is in upheaval.

With the recovery of 1991 failing to materialize, the economy is depicted as lingering in the longest contraction since the Great Depression -- even though the decline in national output has been relatively shallow.

Some experts have pointed out that though many classic forces of economic revival have fallen into place, they have not yet sparked an upturn.

But the American economy doesn't turn on a dime and there is TC far more solid case for recovery in 1992 than there was in 1991.

For one thing, it will take time for the Federal Reserve's dramatic easing in monetary policy in December to work its way through the system.

The reductions in short- and long-term interest rates in this recession are now quite comparable to the drops that were sufficient to spark earlier recoveries.

Inflation is running at a subdued pace not seen since the 1960s. And the U.S. dollar is significantly undervalued and therefore quite competitive.

That has given an edge to manufacturers that they didn't have at the end of the last recession when the dollar was greatly overvalued.

Finally, there is the likelihood of an election-year tax cut -- a dose of old-fashioned fiscal stimulus that could reinforce the momentum of a fledgling recovery.

But what about the unmistakable malaise of the American consumer that has neutralized the cyclical revival?

This can be traced to the restructuring of America's vast service sector. Long sheltered from competition by regulation and the lack of foreign competition, service companies had lapsed into complacency and inefficiency. That is now changing.

The government has deregulated the service sector, and foreign players have joined the battle for a market share.

Now, for example, four of the 10 largest banks in California are owned by the Japanese. A British company has bought Manpower Inc., one of the largest U.S. employment agencies, and several American insurance companies and department stores are now foreign-owned.

Ill-prepared for these realities, U.S. companies have embarked on intense cost-cutting. This has put unprecedented pressure on the 60 percent of the American work force employed in services, largely in white-collar occupations.

Since last April job creation in services has come to a virtual standstill. Consequently, the burden of recession has shifted to the white-collar work force -- a group that has not known true economic pain.

Yes, blue-collar workers are also hurting, but they have long been accustomed to harsh economic winds. It is now office workers who no longer take job and income security for granted.

So what gives me the audacity to expect an upturn in 1992?

The spark could well come from a peaking of the first wave of these job losses. The big cuts have now been made -- courtesy of unprecedented bank mergers, airline failures and consolidation in retailing, advertising, telecommunications, accounting and law in 1991.

But there is a limit to how much the service sector can slash, especially if the demand for service transactions remains resilient, as it has during this recession. Labor-intensive service companies need an expanding work force to meet this demand -- unless, of course, they miraculously raise white-collar productivity. Barring that possibility, hiring must resume.

Thus, the initial blows of white-collar shock should shortly begin to subside.

As the large majority of these workers realize that their livelihoods remain intact, they will breathe a sign of relief and open their eyes to the reality of lower interest rates, reduced inflation and the likelihood of a tax cut.

Increased confidence will supplant fear and the resilience of the business cycle will spring back. As always, the surprise will come when things are on the upturn. It just never looks that way when you're at the bottom.

Stephen S. Roach is principal and senior economist at Morgan Stanley.

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