Masonry Magazine June 1989 Page. 29
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The Odds of a Soft Landing
The odds are increasing that the economy will make the soft landing that so many economists in government and industry have been hoping to see. They can cite several encouraging signs of a slowing in activity-the kind that can head off an acceleration in inflation without causing a recession. It would be a neat trick if an only limited easing does finally come off; such fine tuning has rarely, if ever, been achieved in the U.S. in the past and evidence of softening is still sketchy. But key sectors do seem weaker.
The latest business figures encourage the impression of a slowdown. They are far from conclusive and could merely be reflecting a short lull. But, on the whole, the data does hint that activity is moderating slowly and smoothly.
Certain areas of past strength seem to be losing some of their steam. Payroll employment has been rising less rapidly over the last month or two; in March, for example, jobs rose 180,000, 100,000 less than a month before. Last year, employment increases were running at better than 300,000 a month. Industrial production has gone virtually nowhere since the beginning of 1989; output has been essentially flat after posting steady increases during 1988. New factory orders have been exhibiting some major weakness in recent months. Except for aircraft, bookings have declined all through the first quarter.
Some of the softness is linked to slowing demand for U.S. exports. Export growth has eased substantially from the brisk increases registered last year. Recent dollar gains mean exporters will not gain further from currency's shifts.
What's more, interest-rate sensitive sectors seem to be losing zip, suggesting that current substantial monetary restraint is starting to bite. The consumer seems to have adopted a more cautious approach to his buying. Retail sales have been largely flat in recent months, especially for autos: car sales have run at a 6.6 million annual rate, the weakest in 17 months. A new round of cash-back and financing incentives may increase auto sales. But the incentives have generated only limited increases in sales to date, and industry executives aren't optimistic volume will match the 1988 pace.
Home-building is also feeling the impact of higher mortgage rates. Both new and used home sales have been on the decline since the start of 1989. Housing starts have fallen sharply, as have new permits to build. Experts believe that housing has passed the peak reached last year, as the higher interest rates price a growing number of purchasers out of the market.
Over-all business measures looked surprisingly good last quarter, but were inflated by the elimination of the effects of the drought. Real Gross National Product, total output of goods and services, net of drought impact, rose at a 3% annual rate, a little less than that of 1988's fourth quarter. Anyway, this rate of growth is viewed as still too strong by many analysts who fear inflation. They hope growth will shrink to a 2% rate or even less. Hitting that target requires that growth keep slowing further to year-end.
History shows many cases where a seeming slowup was only a pause. Analysts can't rule out the possibility this time. But they are hopeful that the softening is real this time.
As noted, achieving a soft landing may well require a small miracle. America's economy has not shown great ability to control its rate of growth. The standard end to a cyclical upturn in a cyclical downturn a recession. But the analysts are saying it does not have to be that way in this cycle. There doesn't have to be the recession that many forecasters are predicting. Some forces that usually prompt a downturn in business are not present now, such as excessive build-ups in inventories or dizzy securities speculation.
Net, the economists are forecasting the best of all worlds: Slowing in business activity, while avoiding a recession.
Analysts aren't as optimistic over the outlook for inflation in 1989, even if economic activity does decelerate during the remainder of this year. Certainly, there are a few signs now of slowing in the indexes rise from 1988. On the contrary, there has been a definite pick-up in inflation this year. The underlying rate of inflation is now running at 5%, up from 4.3% in 1988. And the price statistics may keep coming in on the high side in months ahead as the hikes in oil and gasoline prices work their way through the economy. Prices, other than energy, are also continuing to rise along a broad front. Retail prices could soon feel the impact of the higher basic inflation rate.
Labor costs are also a major concern of many economists in government and in industry. With markets tightening, wage and salaried workers are demanding and getting higher pay.
History suggests that the inflation rate isn't likely to decline soon, even in the economy slows to, say, a 1%% to 2% rate during the rest of 1989. During the 1969-70 years, there was no abatement of inflationary pressures, in spite of the fact that the U.S. economy was in the middle of a recession.
Economists view 1989 as a transition year in the inflation battle. They want to halt the upcreep of the