Bloom fades for U.S. economic recovery

September 12, 1994|By New York Times News Service

For the first time in three years, fall is not bringing a powerful burst of growth to the U.S. economy. It is a decisive sign, many economists, government officials and business executives say, that the strongest days of the recovery from the 1991 recession may be in the past.

"No one is expecting -- not the Federal Reserve, nor the administration nor the forecasters -- for the economy to return to the peak growth rate that was reached in recent months," said Alan S. Blinder, vice chairman of the Federal Reserve and, until June, a member of President Clinton's Council of Economic Advisers.

That recognition has renewed the perennial debate over how much economic growth is possible without bringing on damaging inflation.

One camp says that the robust expansion could not be safely sustained without driving up prices so much that the purchasing power of people's savings would be eroded.

The other camp argues that the recovery is being cut short way before damaging inflation might occur -- and before it could raise wages and living standards.

The debate will almost certainly intensify in coming days as the Federal Reserve considers at its next policy-making meetings, later this month and in November, whether to raise interest rates yet again to slow economic growth, and with it inflation.

The Blue Chip Economic Indicators' September survey of 50 prominent forecasters, released over the weekend, endorsed Mr. Blinder's assessment. The forecasters have become more pessimistic about growth in each of the past three months and now estimate that the economy is growing -- expanding its production of goods and services -- at a 2.2 percent annual rate.

That is well below the peak of 4 percent that lasted for a year, until early summer. This year, unlike last, the burst of growth that had started in the fall did not disappear in the winter and spring months.

If 4 percent growth is the high mark of this ninth recovery since World War II, it will be the weakest -- too weak to make wages rise faster than inflation.

During most recoveries, the wage of the typical U.S. worker gained ground on inflation. But this time the typical wage, including that of the college educated, has lost ground. Even though last winter's burst of growth helped to create more than 4.5 million jobs, it was not enough to halt the wage deterioration.

"My impression from my talks with executives is that the bloom has come off of the economic recovery," said Jerry Jasinowski, ++ president of the National Association of Manufacturers, whose member companies have been a pillar of the recovery.

"The reports I'm getting in the last week or two are that sales and production are slowing down a bit across manufacturing."

Weaknesses in housing and in retail sales have also become apparent, and stockpiles of unsold goods have built up.

Yet important sectors of the economy remain strong. Car and truck production, for example, is robust. So are steel, paper, computers, computer chips and machinery. And while Americans might be spending less, Europeans and Japanese are spending more on imported U.S. goods as their economies recover.

These strengths reinforce the fears of rising inflation among those who believe that slower growth is safer, notably the Federal Reserve.

Indeed, the slowdown was fostered by the Federal Reserve, which has raised interest rates five times since early February.

The bond market, composed of millions of lenders, has also played a big role in slowing the economy, pushing up interest rates even more forcefully than the Federal Reserve.

In Friday's bond trading, these lenders asked, in effect, for another increase in interest rates, after the Labor Department reported that factory prices rose sixth-tenths of 1 percent in August.

"The policies are in place to slow down the economy," said Lawrence J. Meyer, an economic consultant in St. Louis. "We just don't know if we have the rates high enough yet to do the job."

This determination to keep the economy moving downward for a while has brought angry public criticism from business leaders who had remained silent until the Federal Reserve announced its fifth increase in interest rates, in mid-August.

"One more rate increase by the Federal Reserve will drive the economy into the ditch, bringing on a recession," Mr. Jasinowski of the manufacturers group said.

The Federal Reserve's stated goal is to engineer a slowdown without a recession. Its view, shared by the bond market and many economists, is that inflation, now less than 3 percent annually, would spike upward if the economy were to continue growing at last winter's strong pace. In this view, the nation lacks enough skilled workers, factories, equipment and materials meet such demand, and shortages would drive up prices beyond what people could afford. The Fed might then have to provoke a recession to bring down the inflation rate.

The Federal Reserve's method of dealing with a growing economy evolved out of policies and practices developed in the early postwar decades, when the U.S. economy was more self-contained.

Now global competition and changing business practices give the nation more leeway for economic growth without inflation, Mr. Jasinowski and other opponents of the Fed approach argue.

"There is still quite a bit of uncertainty about how fast the economy can grow," said Robert Wescott, chief economist at the president's Council of Economic Advisers.

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