Masonry Magazine October 1986 Page. 36
theWASHINGTONvire...
There's little that's reassuring in the trend of the economy these days, according to economists in government and industry. Business simply isn't showing any real signs of the pick-up that has been long predicted. The business picture is the same as it has been for too many months now key sectors showing some solid pluses, but others continuing very sluggish. These economists are not ready to abandon their prediction of an upturn-but the longer the lackluster showing continues, the more worried they are.
Earlier, analysts were sure that the ingredients of a pick-up were in place. Low interest rates, a lowered dollar and cheap oil would bring a rebound. But the upturn is nowhere in sight. There is now even some concern about recession.
So far, at least, the damage of low oil prices has swamped the benefits. The lower dollar has failed to alleviate the country's dismal trade picture. And lower interest rates are providing only a limited amount of economic stimulus.
Analysts can still point to major sectors of strength in the picture. The consumer has contributed substantially to what growth there has been. He has been purchasing at a pretty fair clip, especially in the first half, when personal consumption expenditures rose at a very healthy 5% to 6% pace. Here, declining oil prices and interest rates have meant a favorable impact.
But economists find it hard to see the consumer keeping up that tempo. His debt burden remains very heavy and pent-up demands for autos, for example-have been met.
Home-building remains the strongest element in the business picture, though even this sector has edged off somewhat from its recent brisk pace. Single-family construction is the biggest gainer from lower interest rates. But multi-family starts have been declining with the rise in vacancy rates. And removal of real-estate investment incentives in tax reform won't help.
There are some troubled areas on the business landscape. Clearly, capital investment is a large negative to the economy at this time. Industry has been steadily trimming back on plant expenditure all year long. With so much idle capacity in the economy, such expansion isn't called for.
Now, tax incentives for capital investment are being reduced by tax reform. It will take a boost in orders and production to encourage business to spend more for plant and equipment.
A disappointing trend is related to what's happening in foreign trade. The lower dollar was supposed to have produced a lower trade deficit by now. The currency started its recent, quite steep decline more than 18 months ago; that should have spurred exports, depressed imports, and shrunk the deficit. Instead, the trade balance deteriorated further during the first half of '86.
Some analysts insist that it is still too early to see the trade benefits from the lower dollar. They point out that the prices of imported products have just begun to increase at a brisk pace. It is only a question of time before U.S. demand shifts from foreign to domestic products and services.
But others are starting to doubt that the big benefits will ever come. While the dollar has declined a lot against currencies of Germany and Japan, it hasn't dropped against the currencies of many other industrial countries-Korea, Taiwan, Brazil, and Canada, this country's biggest trading partner. Imports from these countries may be replacing those from Europe and Japan.
What's more, the German and Japanese economies have been sluggish, limiting prospects for sales of U.S. products.
Still-optimistic economists aren't throwing in the towel on a pick-up. They are not yet inclined to abandon their forecast of an upturn this half. There's still a chance of hitting 2%% to 3% in real Gross National Product-the economy's total output of goods and services after taking out inflation.
But there has been slippage in confidence as the weakness continues. This suggests the need for added stimulation.
The Federal Reserve clearly wants to keep the U.S. economy expanding. It has lowered the discount rate on a number of occasions since last spring. But expansionary monetary policy brings only limited impact in this setting. To be sure, the decline in interest rates has spurred housing and building. But, as noted, it's not halting a slump in commercial or apartment-building. Nor are low rates enough to overcome the general caution among businessmen.
Nevertheless, credit ease is the only stimulative policy available. Fiscal policy is, if anything, in the process of turning more restrictive, as the Gramm-Rudman law trims the Federal deficit and expenditures are cut. So the Fed will keep edging rates down to counter any weakness in business. It wants to make certain that the economy does not slide into a recession.
A downturn now could lead to serious consequences for the financial system-both here and in less-developed nations.