The Harder They Fall

The recession stands to be deeper and longer than advertised

The most anticipated recession in history has arrived earlier and with a more forceful jolt than expected. Instead of the gradual slide that economists were predicting would begin in midsummer or early fall, the second-quarter gross national product fell at a substantial annual rate of 3.3%. Most forecasters had anticipated that the downturn at worst would bring a decline of 2% or so. In a confidential revised forecast last week, some top governmental economists conceded that the slump will be worse than anticipated this year and will be followed by an "anemic" recovery in 1980.

They now predict that unemployment will rise to 8.2% by the fall of 1980--just in time for the presidential elections. That is well above the 6.9% rate predicted by the White House last month. Real G.N.P. is expected to drop 1.4% this year. Because the recession will hang on through next spring instead of ending late in 1979 or very early in 1980, real growth next year will be no higher than 1.1%, instead of the 2% forecast earlier. Finally, inflation will continue to rage at 11% through the end of the year and average close to 9% next year.

Most nongovernmental experts agree, but practically none foresee a downturn as severe as the 1974-75 recession. In their view, the sharp rise in oil prices by OPEC significantly aggravated and speeded the onset of a recession that was inevitable.

Soaring oil costs not only boost inflation but also act as a direct tax on U.S. consumers, draining buying power from the domestic economy.

Says Otto Eckstein, a member of the TIME Board of Economists: "Most of the second-quarter drop can be traced to the disruption of auto and truck sales and the scarcity of gasoline that kept many shoppers out of the stores. Yet there is no reason to look for an especially deep recession in the year ahead." Less optimistic is Robert Nathan, another member of the TIME board. He foresees a slump that could last six quarters and a jobless rate that could hit close to 9%.

The chief cause of the decline is the collapse in consumer spending. In the second quarter, retail sales, discounted for inflation, fell 1%, the first real decline since 1974.

Consumers cannot spend big because personal income has fallen behind the pace of inflation for five of the past six months. In addition, consumer confidence has been badly eroded.

Across the country, many stores are holding heavily promoted early summer sales to lure economy-minded customers. Some Chicago stores, for example, are marking down lawn furniture, usually a brisk seller at this time of year, by 30% to 40%. Worried retailers are either cutting or holding back on fall orders.

The industry most severely dented by the oil run-up is auto manufacturing. Unable to change its production mix fast enough to catch up with the rush to small models, Detroit wound up July with 2.1 million unsold cars, mainly gas gulpers. Based on current sales rates, that adds up to an 80-day supply in inventory, vs. a 66-day backlog a year ago. Two weeks ago, General Motors, in its first major cutback since 1976, reduced production schedules for 1980 cars, and announced layoffs of 12,630 employees. That brings to more than 45,000 the number of auto workers let go in recent months.* Though this is bad enough, it is nothing like the layoffs in the last recession, when at one point 212,000 workers were idled.

Another sign that the recession is well under way is the 3.8% drop in productivity--output per worked hour--in the second quarter. It was the steepest drop since the first quarter of 1974. In any downturn, productivity is one of the first measures to slip because businesses have not yet reduced their work force to match their reduced output. Unemployment in July, for example, rose only .1%, to 5.7%. Falling productivity also fans inflation, because it increases labor costs, which are often passed on to the buyer in the form of higher prices.

The one bright spot is business spending for new plant and equipment, which could cushion the slump. Plummeting truck sales caused capital spending to decline about 1% in the second quarter, but in June capital goods orders surged 5.7%, and are expected to run far ahead of the economy in general. Businessmen have to spend partly because the U.S. has lost much of its competitive edge against the rest of the world. The U.S. will have to invest heavily to develop energy, expand mass transit, create fuel-efficient cars and modernize aged steel mills, rubber plants and other basic industries. As one White House economist put it, "We consider this a consumer recession. All our surveys of intent show that business investment is likely to continue."

Despite the recession, the Administration's chief goal continues to be licking inflation, now running at 13.2%. That determination was echoed last week by Paul Volcker, chairman of the Federal Reserve Board, who plans to take a tough stand on monetary policy to restrain prices. Said he: "I don't want interest rates any higher than they have to be. Unfortunately, I don't know of any way of keeping interest rates as low as they used to be." Some moneymen believe that the prime lending rate by autumn will rise from 11 3/4% to a record 12 1/2%, a level that would probably dampen inflation but further weaken the prospects for an early recovery.

Yet for all the emphasis on inflation fighting, there is a growing feeling in Washington that a tax cut of between $20 billion and $30 billion may be enacted this year to take effect Jan 1. Proponents argue that the cut would only restore buying power diminished by the foreign oil price increases. President Carter has told Senator Lloyd Bentsen, chairman of the Joint Economic Committee, that such a cut is a possibility. White House economists have floated the idea of a $25 billion reduction, $5 billion going in investment incentives to business and $20 million in lower Social Security payroll taxes for employers and workers. Republican legislators are driving for significant income tax reductions.

Whatever happens, the nation's economic policymakers will continue to be torn between easing monetary and fiscal policy to fight recession and tightening up to combat inflation and bolster the dollar abroad. For them, and for millions of other Americans who will be hit by the downturn, the months ahead will be hard and stressful.

* Supplemental benefits are paid to all U.A. W. workers with at least a year on the job and when added to governmental jobless benefits add up to about 95% of the workers' take-home pay.

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