Masonry Magazine April 1989 Page. 29
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INTEREST RATES MAY BE CLOSE TO PEAKING OUT, economists in government and industry feel. The Federal Reserve has been tightening monetary policy for the last year-raising some interest rates by three percentage points. There is some evidence that the lofty rates in place are starting to bite. While business activity is continuing at a fairly brisk pace at the moment, there are some straws in the wind pointing to a desired economic slow-down.
The economists aren't betting the ranch on their interest-rate outlook. They were hoping that rising rates would have slowed the economy before now. But the current expansion has shown surprising strength and durability. It is now in its seventh year, making it one of the longest in U.S. history. But many believe that monetary restraint is finally working. They now expect to see hard evidence of its results in the near future.
IN FACT, THE ECONOMISTS CAN ALREADY POINT TO SOME SIGNS of softening. Economic activity has been in the process of slowing down for some time now. Real Gross National Product-output of goods and services, after inflation-climbed at a 5.3% rate in 1987, slowed to 3.9% during the first half of 1988 and eased to a 3.1% rate in the second. (Drought effects are factored out.) What's more, these analysts see softening in two key sectors of the economy, areas that provided earlier thrust... exports and business capital spending. Orders for nondefense capital goods, excluding aircraft, have been dropping, as have backlogs of orders suggesting a slowing in these important areas.
And inventories of materials and supplies have shown a slight decline, the first such easing in more than two years. This implies that business after a period of strong production... sees output leveling in months ahead. The measures of vendor performance have been less vigorous since mid-1988. In other words, companies reporting slower deliveries are fewer now.
THE EXPERTS THINK IT'S ONLY A MATTER OF TIME before consumption ebbs. The consumer has continued spending despite the increases in interest rates. But the experts can't see how the strength in this key sector can continue. They don't expect employment to keep advancing at the pace of recent months; initial claims for unemployment benefits have been increasing since October. As job growth slows, generation of disposable income will run out of steam.
High mortgage rates are having a depressing effect on housing. There was an uptick this winter because of mild weather. But, over-all, evidence suggests that home-building is turning down. Federal spending won't be a plus, either. The Budget will be trimmed in line with the Gramm-Rudman law, which calls for a deficit of $100 billion, some $35 billion below current levels. State and local government spending won't take up the slack.
FEW ECONOMISTS ARE FORECASTING THE BEGINNING OF A RECESSION in 1989. There are few signs of any significant impediments to continued expansion. The danger signals that preceded downturns in the past aren't apparent now. Rather, most think that real GNP could well slow to about a 2% growth rate over the last three quarters of this year. That would mean a soft landing an economy growing, but slow enough to avoid a major break-out of inflation.
THIS OUTCOME WOULD ALLOW THE FEDERAL RESERVE to suspend tightening. The central bank would call a halt to its extended march toward restraint. As a result, both short and long-term rates wouldn't have to rise further. They may well stay within a narrow range, around where they are currently.
But interest rates aren't likely to reverse direction and head lower any time soon. The Fed isn't expected to ease its restrictive monetary policy in a hurry. After all, slow economic growth is what officials have been seeking.
WHAT'S MORE, INFLATION MAY REMAIN WORRISOME even if business softens. Recent developments on the inflation front have been disturbing to analysts. Signs are growing that increases in the price indexes are picking up steam. Producer prices in January rose 1%, the largest advance in some three years. The volatile food and energy component accounted for a big part of the gain. But prices of both crude and intermediate materials posted sizable advances.
And there are indications that wages are beginning to move up faster. Average hourly earnings climbed at a 7 1/2% annual rate during January alone. Pay and fringe gains of workers rose 4.9% in 1988 from 3.3% in 1987.
ALSO TROUBLING: A TIGHTENING of industrial-sector supply conditions. The rate of capacity utilization has moved up steadily, to 84.4% in January. Labor shortages are materializing in an increasing number of key industries. Hopefully, a slower-growing economy will call a halt to upward price trends. But some economists worry that real GNP growth of 2% may even be too much... that the inflation rate will continue to move upward for some time to come.
These analysts think that economic activity will have to slow to around 1% to keep wages and prices from rising.