Masonry Magazine June 1984 Page. 13
theWASHINGTONire...
THE ECONOMY IS SLOWING but is it slowing enough? This is the key question concerning economists and government officials these days. That's why they will be scanning every incoming business figure in the weeks ahead for a clue to the tempo of activity that we will see over the rest of 1984. The analysts forecast a speed-up in inflation if the pace fails to ease up to a degree that will assure that overheating a boom-doesn't materialize. Further interest-rate hikes are certain if the slowing proves too limited.
Signs of cooling are clear in statistics already released. They show that the economy is no longer on a hectic climb. The figures for March have brought a definite new trend:
* Unemployment registered no new drop, after large gains.
* Payrolls rose less than half as much as in past months; the average number of hours worked declined by a little.
* Retail sales slumped, though auto deliveries remain high.
* Industrial production rose at less than half prior rates. This supports some forecasts of modest gains this spring-growth at 2%-3% a year, down from last quarter's 7%-plus.
BUT THIS ISN'T NECESSARILY THE DOMINANT VIEW among leading analysts. One month of smaller gains, right on the heels of two such vigorous months as January and February, doesn't assure a significantly slower growth trend. There are those who can make an equally strong case for further fast growth. Much of the slump in retail sales could have reflected the very late Easter and bad winter weather; many retailers say they are still quite optimistic. And, even if housing starts fell substantially from the 2-million-plus rate of mid-winter, the lower level still exceeds economists' earlier forecasts.
What's more, business investment seems certain to provide strong lift. For one thing, a big inventory buildup, long delayed, is finally under way; efforts to get stocks into line with sales mean more orders, hiring, and output. For another thing, spending on new capacity, already vigorous, continues to rise. And the enormous Federal deficits will continue to generate additional employment and new demand.
BALANCING THE SLOWING AND THE STRENGTHS leaves economists worrying that there's not enough cooling: the expansion still has plenty of momentum. There's still considerable danger of overheating as more industries approach effective limits of capacity and prices and wages begin to rise more rapidly. Few would go along with growth of only 2%-3% this quarter. On the contrary, quite a number worry about 5% or 6%, which would still be unacceptably high. It would take about 4%-maybe less to allay Federal Reserve inflation fears.
One official draws an analogy with a speeding car: A 90-mile-an-hour rate is dangerous. Going down to 65-70 is a slowing but still too much. It could bring a clamp-down.
NO ONE, OF COURSE, CAN CHART THE ECONOMY'S NEXT PHASE with accuracy. And that includes those powerful credit-controllers at the Federal Reserve. But they are wary on guard for any evidence that growth is still too rapid. The money managers are planning to let the incoming numbers call the tune. For now, they will stand pat... until the business picture becomes clearer. How long will this pause last? Maybe only a month maybe a little longer.
THE PREVAILING HUNCH is that the economy probably will not cool off enough. But that's all it is a hunch-though it is widely held at the Fed. This is why it would be premature to conclude that interest rates won't rise further as 1984 rolls along. Certainly, the stage is set for another hike. Credit demand is still very strong-from consumers, business and government. Money-supply growth is high-not sufficient by itself to trigger any action to tighten but a reinforcing factor should the economy keep growing too fast.
Interest rates could conceivably creep up another point or so, more or less, during the remaining months of the year.
HOME-BUILDING COULD BE HURT by a one-point rise in mortgage rates. The decline in housing starts.... from a 2.2 million-a-year pace in February to 1.9 million in March.. was expected. The higher clip was unsustainable. But starts could drop even further to as low as 1.5 million, some believe. That could contribute to the slowing in the economy that's discussed above.
Mortgage rates can easily hit 14%. Indeed, that's in the bag already. In the past, that level has tended to be an unmanageable block for large numbers of would-be buyers.
Officials worry over the impact on variable-rate mortgages if a rise in rates of a point or more materializes. Many home-owners would be forced to pay more than they planned, which would leave less for other spending. "A financial time-bomb" is what one highly respected analyst calls it.
WASHINGTON IS ALSO CONCERNED about a revival of inflation this year, precisely because of the possibility too rapid economic growth may persist. Some price spe-
MASONRY-MAY/JUNE, 1984 13