Masonry Magazine August 1989 Page. 13
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The Business Expansion
The business expansion will continue in the second half of 1989, but without much zip. Economists in government and industry expect only small gains, almost matching those of the first six months. They still hope that the economy will make a "soft landing"-that is, that growth will be slow enough to ease inflation without a recession. And analysts do see enough lingering support to assure modest growth. It will come from small gains in consumer spending, a little more exports and hikes in capital spending. Few of the danger signs that in the past have warned of a slide are visible.
It's not really a dire forecast. It may be appropriate for the times. The consumer is acting cautious, easing demand on resources. Retail sales lack vigor, mainly for durables, where earlier pent-up demand has been met; auto sales are running 6% under 1988's level, despite big sales incentives. Consumers, it seems, would rather save money than spend it. The cautious attitude is also clearly evident in the market for homes. New housing starts so far this year are lagging 4% behind the pace of 1988. Though mortgage interest rates have declined, builders report poor response from buyers.
What's more, the rise in employment has slowed considerably in 1989. In June, the total did rise but in services... a lot of summer jobs for kids; manufacturing jobs slipped by 50,000 and the average work-week also dropped. So it isn't surprising that industrial production has flattened out lately. Projected cuts in auto assemblies will put some additional drag on output.
As a result, growth in the first half in real Gross National Product, total output of goods and services after inflation, slowed to a rate of 2%, after last summer's drought effects are removed. That's down from the 3%% pace for all of 1988.
There appear to be enough positive sectors to maintain slow growth. The consumer shows few signs that he'll actually cut back on his spending. Rather, a continuation of modest, but steady increases seems in the cards; note that consumer confidence is being maintained at a fairly high level. Demand for exports will be providing some moderate forward thrust as well, though certainly not at anything like the clip shown during 1988 and 1987; the one-shot adjustment to the decline in the dollar hiked this key sector, but the spur has run its course now. And the dollar's value has rebounded. Nevertheless, exports hit a record in April and can still keep edging up.
Business fixed investment will be the only area of significant thrust this year. Recent surveys show that industry plans to increase plant and equipment outlays by a healthy 6%% in 1989.
Net, the experts feel real GNP will rise at a 12%-2% rate this half. As noted, that would be a little lower than registered over January-June. Such growth wouldn't be enough to prevent the unemployment rate from rising. But it would be adequate to extend an expansion that's in its seventh year-making it the second longest-running business upturn in the post-war period.
The analysts see little basis for predicting the start of a recession, but they don't discard the possibility entirely.
At the moment, it's hard to find evidence of a recession's beginning. Industry isn't building inventory, as is usually the case before a downturn. This implies that output won't have to be slashed, except perhaps in autos. And there don't seem to be signs of speculative excesses in other sectors. But history does weigh heavily against the consensus soft-landing scenario. Since World War II, the U.S. has never been able to pull off such an outcome. Periods of expansion are typically followed by periods of economic downturn.
All this does not mean that America cannot be lucky this time around. But things have to break right to avoid a recession.
Forecasters see a diminishing threat of inflation in the second half, though they are not willing to say that the danger is entirely in the past. For the short run, they expect another month or two of unpleasant numbers. Both producer and consumer prices are rising at a worrisome pace this year. The indexes have accelerated, spurred by rising prices of gasoline and food. So far in 1989, for example, consumer prices have risen at about a 6%% rate. Nevertheless, the economists see some encouraging trends for the long term. Prices of many basic commodities are off their peaks and are now declining. Wage hikes have been surprisingly moderate, given the tight labor markets. And inflationary expectations have moderated significantly in recent months.
What's more, the slower economy should be easing inflation pressure. Capacity utilization in industry has been edging lower. So business will find it difficult to raise prices.
But the analysts don't expect the inflation rate to decline rapidly. It will take economic growth of less than, say, 2% for an extended period-perhaps a year or more to bring some real improvement in the price indexes. The economy is getting down to around that level right now... but only just.
The inflation rate will fall in the 4% to 5% range for the rest of 1989. That's higher than the 3.4% rate registered last year, but it does not foreshadow a major surge in the price measures.
Interest rates are likely to move gradually lower in the second half. The Federal Reserve please turn page
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