The Wolf Has Arrived

For an overwrought economy, the recession comes better late than never

Shortly after 4 in the afternoon last Thursday, President Carter looked firmly into the television cameras and announced that the economy "has slowed down and has probably entered a period of recession." After a staggering litany of bad economic news over the past month, there is now little doubt that the nation has ended the longest peacetime expansion in its history.

The wolf was supposed to arrive at the door about a year ago, but it was delayed by a bad case of inflationary psychology. For months consumers have been rushing out to buy in the belief that prices, no matter how high already, could only go higher. This has ballooned inflation to an annual rate of more than 18%. But in the middle of March, according to Alan Greenspan, chairman of the Council of Economic Advisers under Gerald Ford, "somebody pulled the plug on the economy." The somebody was Federal Reserve Chairman Paul A. Volcker, who has been working steadily since last August to get control of the growth of money by raising interest rates. The head of the nation's central bank made it clear that he was ready to risk a serious recession in order to get the price explosion under control. In October and then again last month, Volcker jacked up the cost of money. Consumers finally began putting off spending plans, and the economy started to slide. This economic downturn will certainly go into history books as the "Volcker Recession."

Technically, the National Bureau of Economic Research will perform the economic autopsy later this year and, if the numbers hold up, declare the recession official. The rule of thumb definition is two consecutive quarters of decline in gross national product. Though the nation's business actually grew by a scant 1.1% in the first quarter, the economy is sinking fast. Retail sales slipped 1.6% in February and then an additional 1.3% in March. In response, businessmen are pulling back; factory output tumbled .8% in March, following a .2% drop in the previous month. Finally, perhaps the two most important industries, autos and housing, have collapsed (see following stones). Since automobile construction indirectly employs one out of six workers and housing one in five, those declines will ripple through the whole economy.

But bad news everywhere else was good news for the debt markets. Long-term bond prices that had been badly depressed earlier this year last week soared five points in one day, the largest one-day rise on record. The rally was touched off by Economist Henry Kaufman's prediction that interest rates had reached their cyclical peaks. By the end of the week his judgment seemed to be confirmed, when the prime commercial bank lending rate was lowered from 20% to 19.5%.

Few experts expect that this recession will be as severe as the one six years ago, which lasted 16 months and caused output to decline by 5.7%. But the Carter Administration's projections of a "mild and short" decline are so much whistling past the graveyard. TIME Board of Economists Members Walter Heller and Otto Eckstein see the economic drop ranging from 3% to 4%, with a slow recovery starting in the second quarter of 1981. That would make this downturn the second worst since the Great Depression.

Though most of the damage will probably be concentrated in the older industrial areas of the Northeast and Midwest, much as in 1975, the slump is likely to hit all areas of the nation. Sagging housing starts are being felt in furniture and textile factories throughout the South, and the Northwest's aerospace industry will be only as strong as its airline customers.

Despite the economic decline, very little immediate payoff is expected in lower prices. President Carter admitted last week that the cost of living is likely to continue rising sharply for several more months. Treasury Secretary G. William Miller predicts optimistically that inflation will have declined to an average annual rate of 12.8% by the end of 1980. The drop in prices will occur, though, only if the recession is allowed to do its work in an election year. Already various Carter constituencies are screaming as the screws are turning. Even while the President was telling newsmen last week that the recession was "probably" at hand, he was also announcing an additional $75 million in federal spending to revamp the housing subsidy program by cutting interest costs for builders and home buyers. After everyone has so long anticipated the recession, the temptation now will be to stop it quickly with a new rush of spending from Washington. qed

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