Masonry Magazine April 1987 Page. 27
theWASHINGTONire...
WASHINGTON IS MILDLY UPBEAT ABOUT THE ECONOMY for the rest of 1987. Recent data indicate that the year got off to a faster-than-expected start. Employment, trade, and production imply a fair amount of business momentum. Few government analysts were forecasting an actual recession during 1987, but many were predicting quite sluggish gains during this year's first half. Now, instead, the experts see maintenance of a moderate tempo of activity, with the prospect that business will pick up some steam later in the year.
The statistics reveal a burst of activity late last year. Personal income, wages and production climbed at a 6% rate in the last quarter, though a dip in inventories held the total growth down. But lower inventories hint at a rise in new orders-and slightly more vigor-ahead. What is more, home-building showed a fairly good increase in December, and even foreign trade has registered a clear improvement.
This improvement in business acitivity carried into this year, as well; jobs jumped a healthy 448,000 in January. February saw some lull, but it's likely to be temporary.
RESTRAINING THIS OPTIMISM, HOWEVER, IS CONCERN about the consumer. Consumption spending accounts for about 60% of over-all economic activity. It has largely sustained the expansion, which is now starting a fifth year. Consumers have done it, in part, by drawing down savings and by borrowing. There is some worry among economists that the consumer will now retrench.
Retail sales fell in January, led by a steep decline in auto volume, which was to be expected after last fall's buying boom. But, even excluding car deliveries, sales were lackluster; in fact, they were down, but only 0.1%.
FURTHER, THE ECONOMY WON'T GET MUCH THRUST from business spending. The latest Commerce Department survey suggests only a 1% increase for 1987. There is no great incentive to build new plants with so much capacity idle. And most businesses are keeping a close eye on their inventory investment. With inflation low, there's little profit in making additions to stocks.
BUT THERE ARE SIGNS OF THE LONG-AWAITED REVERSAL in foreign trade. The deterioration in this nation's trade balance appears to have ended... and evidence that the corner has been turned is more decisive as of now. The dollar's sharp decline did not produce much improvement during 1986-the faster economic upturn that a shrinking deficit was supposed to bring. But the further drop in the dollar this year could help on the trade front.
Analysts are leery about counting on this too much after 1986's performance. They cannot be certain how fast the anticipated improvement will take place. So far, though, most of the signs are plus for progress to better balance.
THUS, OVER-ALL, OFFICIALS THINK THAT 1987 IS OFF to a rolling start. Concern about an anemic first half-year has eased considerably as of late. Now, the analysts can envision an increase in real Gross National Product-the total output of both goods and services after netting out inflation-at about a 2% annual rate this half, rather than the 1% or so seen earlier.
WASHINGTON DOESN'T SEE AN EARLY DANGER of worse inflation from this sort of economy, despite January's 0.6% rise in producer prices. The large increase mainly reflected increased prices for petroleum products-and oil prices are considered unlikely to climb much more in the future. Meanwhile there is encouraging evidence of restraint on wages and salaries, as well. What is more, productivity gains in manufacturing have been quite sizable.
Nevertheless, inflation will be more rapid than in 1986, if there's no further give in oil prices. And the lower dollar will no doubt lead to higher prices for imports. Inflation could conceivably exceed the 3% to 34% range, still a fair performance in the fifth year of expansion.
CHANCES OF STILL LOWER INTEREST RATES HAVE DIMMED in recent weeks. The economy's relatively good start does not call for monetary stimulus. As noted above, business keeps advancing at an acceptable rate of growth. In addition, Federal Reserve officials see some dangers in easing further. Lower interest rates could well send the currency into a tailspin... again. A sharply lower dollar might lead to even stronger inflationary pressures, as even wider exchange-rate differentials make imports even more expensive.
In fact, the next monetary move may well be a tightening. Economic activity may pick up even further steam than now forecast, spurred by exports and reduced price competition from imported products. The Fed then may want to tighten and see somewhat higher interest rates, to keep the upturn going into a sixth year and to avoid refueling inflation. But a move by the Fed still appears months away-at least.
THE STEADY DECLINE IN THE DOLLAR'S VALUE MAY HAVE REACHED its end. The U.S. and its economic allies want to stabilize foreign-exchange rates. Many U.S. officials believe that the dollar has declined far enough now.. far enough to cure this nation's trade imbalances over a period of years. The Administration is now willing to act to prevent any further decline, with both West Germany and Japan ready to spur demand in their countries so they can absorb a larger share of world imports and cut the imbalances.
The West German economy actually stagnated at the end of 1986; Gross National Product didn't grow at all from the third-quarter pace, industrial produc-
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