Masonry Magazine February 1992 Page. 56
THE WASHINGTON WIRE
Expect Consumer Spending to Rise At A Very Slow Pace
Modest growth would be accompanied by only meager gains in production, little drop in the unemployment rate and hardly any reduction in inflation.
CURRENT CREDIT CRUNCH to linger on for some time yet, despite White House actions designed to increase the pace of bank lending. While economists in government and industry view the administration's new regulatory tinkering as helpful, the don't believe these steps alone will alleviate the credit shortage. To be sure, tight supervision has had its role in the slowdown in lending. More important, though, are decisions in the private sector-by banks and borrowers. There exists a real sense of caution on both sides that isn't likely to come to an end any time soon.
At best, this conclusion means a slowly growing economy for some time. At worst, it suggests the possibility that the upturn in business will lose momentum as the months go on.
THE PRESIDENT CHOSE TO SPUR LENDING after complaints by businessmen, who charged that regulators are being overly restrictive in judging loans. The new package is aimed at removing some impediments to more bank lending. One change will ease limits on preferred stock sales to raise bank capital. Another shift sets up an appeals process for banks on regulatory decisions; banks that think they have been treated too harshly can use this procedure. The regulators will set longer guidelines to free up real estate valuations and easier loan-loss reserve rules. Bad real estate loans are the problem. Properties will be valued on income production rather than the sales price.
Bush also agreed to support legislative initiatives that many bankers want. These include changes in laws to make personal bankruptcy less attractive. Bankers argue ease in going that route causes them to be more cautious about making new loans. The Administration also backs a bill to limit environmental liability of banks lending on land tainted by toxic wastes.
ECONOMISTS QUESTION WHETHER CHANGES will ease the credit crunch. Banks in some areas of the country face further big real estate writeoffs. This fact will curb their ability as well as their eagerness to make loans; small and medium sized companies will have the hardest time getting credit. But the experts think the slower lending is also a function of weak demand, not simply the unwillingness of bankers to lend to credit worthy borrowers.
Consumers have been paying down debt rather than putting on more the normal response when there is slow growth in both employment and earnings. In turn, the slowdown in consumer spending has dampened the need of busines to borrow heavily.
NET, THE CHANGES ARE LIKELY to be only a marginal plus for recovery, not sufficient to quicken the pace of expansion by any significant measure. The experts believe there can be no quick and easy solution to this crunch. The U.S. is working out of the damage caused by the excesses of the 1980's. Faster growth can come only as the bad loans are cleared out of the system, outsized credits are worked down and lender-borrower confidence is rebuilt.
Most of the analysts believe that the work-off of bad loans will be a long, drawn out process. The real estate sector will remain especially troublesome; it may be several years before the glut of foreclosed property can be cleared away.
MEANWHILE, BUSINESS ACTIVITY will keep moving ahead at a slow pace. Early reports hold that the economy grew at about a 2.4 percent rate last quarter. That is far below the historic average for the first months of a recovery. Such modest growth would be accompanied by only meager gains in production, little drop in the unemployment rate and hardly any reduction in inflation.
Economists see such an outcome as the most likely of all the scenarios. Consumer spending is rising at a gradual, hardly spectacular pace. Further increases are likely to be mild-in phase with coming modest gains in employment and income.
BUSINESS HAS BEEN CUTTING BACK INVENTORIES further than anticipated, but stocks are now stabilizing. The adjustment aided third quarter growth. A shift to inventory building is likely to maintain the tempo this quarter. U.S. exports are expected to supply additional, but only moderate strength. Capital goods spending by business is due to rise as recovery moves ahead. Homebuilding keeps backing and filling, but tilted toward the higher side.
But those financial constraints remain, holding down growth. And there's little to suggest that the consumer's confidence will suddenly erupt and surge sufficiently to send him off on a spending spree. Federal government purchases are slipping, a drag on economic activity. And severe budgetary pressures are forcing state and local governments to cut back, as well.
SOME ANALYSTS ARE DEEPLY WORRIED about this unsatisfactory outlook. Their concern is that, if the pace of the expansion stays slow, we may see activity weakening again, leading to the much feared double dip recession, in which the jobless rate will edge up again. The economists are troubled at the prospect that the U.S. will be growing below its inherent potential.
Activity isn't growing enough to prevent the jobless
56 MASONRY JANUARY/FEBRUARY, 1992