Nearly three years after the country emerged from recession, it finally looks like a real recovery is underway. Every statistic seems to confirm an upswing: employment is rising, consumer spending is up, housing starts are strong. In expectation of even greater things to come, the stock market last week hit new highs, while Vice President Al Gore traveled to Boston to brag of the Clinton administration’s economic achievements. If you’re still waiting for the roar of jets straining for takeoff, however, you might wish to revise your expectations: the noise you’re now hearing may be as loud as it gets.
Higher interest rates and slower growth lie ahead. That doesn’t mean another recession; prolonged prosperity may well be on the horizon. But it will be a muted, cautious prosperity, the sort that makes you think twice about buying that new Jacuzzi or even having dinner on the town. It may even be mild enough that voters won’t appreciate it when they elect a new Congress next November–a prospect that is beginning to worry some in the Clinton White House. “We think consumers are still pretty worried,” says David Glass, chief of retail giant Wal-Mart. “They pick up the paper and read about more layoffs, and they’re not comfortable going out and spending a lot.”
Here’s what Wal-Mart shoppers were reading last week: Xerox plans to eliminate 10,000 jobs worldwide by 1996. RJR Nabisco will drop 6,000 slots in response to cuts announced by archrival Philip Morris. Southern New England Telecommunications, which had previously announced 1,500 layoffs by 1995, upped the figure to 2,500. U.S. Surgical said up to 500 jobs will go, only two months after it pared 700. On Friday, FMC added 2,500 more to the week’s bloody total. “I’m lucky to be working, making decent wages,” says Carl Judson, a Norcross, Ga., welder. “Ten years ago there would be 10 to 12 jobs for welders in the paper. Now you’re lucky if there are two or three, and a lot of people are applying for them.”
Amid such anxieties, the expansion that actually started clear back in the spring of 1991 hasn’t left Americans feeling warm and happy. That sense of satisfied prosperity may never come: subdued as the party may seem, calls are mounting for the Federal Reserve to take away the punch bowl before things get out of hand. Last month economists from the Paris-based Organization for Economic Cooperation and Development stunned Washington by warning the Fed to raise short-term interest rates, now about 3.1 percent, to the 5 percent range lest inflation take root. With a Fed survey last week pointing to stronger growth most everywhere but California, Wall Street expects tighter money soon–perhaps by next week, when the Federal Open Market Committee meets to discuss monetary policy. Says Paul Boltz, chief economist for the T. Rowe Price mutual funds: “It’s time to worry about the economy barreling ahead and price pressures.”
The labor market is clearly healthier than it was a year ago, with total employment up by 2 million jobs. Much of the economy’s sudden strength, however, is statistical illusion. While the unemployment rate fell from 6.8 percent in October to 6.4 percent in November, that may well be a result of errors in the government’s survey of 60,000 households; roughly one month a year, statisticians say, the reported unemployment rate rises or falls by more than 0.2 percentage points although the true amount of unemployment hasn’t changed. Consumer sales have been running strong, say government data collectors–but big retailers tell a far less cheery story, and with spending rising faster than incomes no consumption boom is in store. Housing starts look impressive compared with 1992’s weak showing, but by the standards of the last three decades they’re hardly buoyant.
How can the economy be doing so well and so poorly at once? Business has not only learned the mantra “lean and mean,” it’s living by it. Companies are doing everything possible to avoid taking on more workers, stretching the average factory workweek to its longest since the laborshort days of World War II. A Philadelphia Fed survey captures the mood: among manufacturers, 60 percent expect higher orders and 43 percent are buying new machines to fill them, but only 24 percent expect to increase employment. “We want to add more equipment,” says Cecil O’Neal Jr., whose Atlanta video business is on the upswing. “It can be written off. People can’t.” At the same time, executives aren’t hesitating to wield the ax on underperformers. The number of displaced workers filing new claims for unemployment benefits is steady at about 340,000 each week. Even firms that are adding workers in some areas are simultaneously cutting back in others. After years of reducing its operating staff, the Santa Fe, the nation’s seventh largest railroad, plans to take on a couple of hundred engineers and yardworkers in 1994, but it will eliminate more positions elsewhere, says chief financial officer Denis Springer.
Despite an abundance of such stories, in some areas labor is in short supply. Schneider National, a long-haul truck line, can’t find experienced drivers as workers shun 14-day stints on the road. in rural Marshall, Minn., $6.50-an-hour poultry-processing jobs go begging. Predicts David Blitzer, chief economist at Standard & Poor’s Corp.: “By the end of [1994], we will be pretty close to full employment.”
Full employment? These days, the term refers to a jobless rate–6 percent–that would have been considered scandalous two decades ago. The days when the peak of the business cycle meant work for everyone are gone. Globalization, that much vaunted trend, means that employers have options beyond the local labor market. When wages rise or the supply of capable workers dwindles, firms can meet their needs overseas. “We’re hearing from our customers now that it doesn’t matter what the plant is doing in Kentucky. If it’s maxed out, you can use the plant in Japan or the plant in Belgium. Ten years ago, that wasn’t the case,” says Joseph Quinlan of Sea-Land Service, a shipping line. The ability to move production abroad is holding down wages even as unemployment falls.
The economic happy talk will be more muted by late winter. International trade, which has been an economic drag this year, won’t provide a spark in 1994; as foreign interest rates begin to fall and U.S. rates rise, a higher dollar will make life tougher for U.S. exporters. Federal budget cutting will also slow things down. An annual growth rate that may be 4.5 percent today is likely to ease to between 2.5 percent and 3 percent a year from now.
By recent standards, 3 percent growth is nothing to complain about. With the population and the labor force expanding less than 1 percent each year, Americans could once again enjoy rising incomes. In a break from the recent past, the economy could grow at that rate for years without sharp ups and downs. But whether slow, steady expansion spiced with frequent bits of bad news will make people feel good is another question. The old boom-and-bust cycle clearly has its downside, but the euphoria of the upside is hard to match.
