For the moment, it is nothing more than an intimation, a faint stirring in the wind. But as the current U.S. recession deepens, an increasing number of economic prophets are beginning to hear murmurs, like the distant roar of thunder rolling across the sky. Unless new fiscal and monetary policies are quickly adopted, many economists are now saying the recession may well become a full-blown depression.
To be sure, portents of economic disaster are few and highly contentious, and the depression school is still very much a professional minority. Yet even such respected figures as Alan Green■ span, a Reagan administration adviser, now concede that “chilling scenarios” can no longer be dismissed as bizarre.
Technically, depression occurs when the unemployment level stays at 10 per cent for a prolonged period. By that
Volcker: keeping his eye fixed firmly on inflation
industries measure, the are nation’s already housing in depression, and auto The rest of the U.S. economy is not far
behind. Last week, unemployment reached 8.8 per cent, and most labor analysts predict it will soon top nine per cent.
The labor statistics capped a week of disheartening economic news. Home sales plunged almost 23 per cent to their second lowest level in 20 years. The big three automakers registered a further decline in new car sales and promptly made plans to slash production. The commerce department’s index of leading economic indicators recorded its ninth consecutive monthly drop.
Faced with such grim tidings, prudent presidents seek out tolerant audiences. And Ronald Reagan spent much of his week doing just that, promoting his budget and new federalism proposals in Cheyenne, Wyo., Albuquer-
N.M., and Los Angeles, Calif. Citing the
declining rate of inflation, lower interest rates
and higher savings, the president insisted that his “medicine is beginning to work” and that the nation’s economy is “poised for recovery.” Perhaps so. But in Washington, administration officials seemed
0 anxious to tether Rea-
1 gan’s native optimism, s “The current downturn will be far worse than £ envisioned in earlier I scenarios,” admitted * deputy treasury secre-
tary Richard McNamar. Commerce secretary Malcolm Baldrige, taking solace from signs that the bottom of the slump may be near, nevertheless confirmed, “The recession has yet to run its course.”
Few areas of the country or sectors of the economy have escaped the ravages of recession. But its impact has been most apparent in recent labor-management contract negotiations. In an agreement that may become the model for the car industry, the United Auto Workers last month ratified a 2 */2-year accord with Ford that cedes as much as $1 billion in wages and benefits in return for job security. And last week, Teamster President Roy Williams welcomed as a “strong and promising settlement” a new 37-month contract for truck drivers and warehousemen that freezes wages at current levels.
Most analysts now believe the recession will endure at least through the summer, unless there is a dramatic fall in interest rates. But with the Federal Reserve committed to its tight money policy, and with the president holding fast to his 1981 tax-cut legislation, there is no early prospect of interest rates easing. Thus the recovery—when it comes—may be choked off.
At the same time, business failures are running at 60 per 10,000—more than double the 1979 level. The nation’s thrift industry, with 80 per cent of its assets tied up in low-yield mortgage loans, is confronting a major shakeout. Its members last week asked Congress for $10 billion in immediate aid, warning that 1,000 savings-and-loans institutions may otherwise be forced to merge or close. While no serious economist is predicting a 1930s-like depression— when unemployment hit 25 per cent and the gross national product dropped 50 per cent in four years—many fear that a major collapse could occur.
Others dismiss such dangers. “The notion is extremely farfetched,” says Leon Taub, chief Washington economist of Chase Econometric Association Inc. “If the standard forecast of a spring recovery accelerating in the summer is wrong, it will err on the side of pessimism.” Taub notes that disposable income is down slightly from pre-recession levels, and a 10-per-cent tax cut this July should give the economy a real stimulus.
Celebrating his 30th wedding anniversary in California last week, the president confidently rejected the depression scare, as did Federal Reserve Chairman Paul Volcker. Still, simply by raising the issue, the financial markets were giving another gloomy measure of the current economic malaise—and their rising fears about the prospects for recovery.
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