Leaving 1980 on an Upbeat

By Alexander Taylor

Some interest rate relief, and Christmas sales end with a surge

American businessmen will close the books on 1980 this week with some relief. Record interest rates, a deep but very short recession and roaring inflation made 1980 a year best forgotten. Yet the uncertainty that was its hallmark is likely to linger into the new year.

In a fitting end to a year when economists were generally confused about what was happening to U.S. business, the Commerce Department last week reported a substantial revision of its statistics. The agency updated, and in some cases radically changed, basic economic figures going back a decade. It was almost as if the experts did not like the old numbers and decided to make up some new ones.

The latest statistics only added more confusion to an already cloudy picture, and set some economists to thinking about new explanations for American business woes. The agency reported that the gross national product grew at an annual rate of 2.4% between July and September, nearly three times faster than previously reported. The Commerce Department also estimated that the economy in the fourth quarter would increase at an annual rate of just under 4%.

The revisions drastically altered the picture of Americans as buy-now, save-later free spenders. The new figures showed that consumers have saved perhaps 20% more of their incomes over the past decade than previously estimated. Between July and September, wage earners put away a prudent 6.1% of their disposable income, rather than the anemic 4.7% reported earlier. Observed Courtenay Slater, chief economist of the Commerce Department: "The notion that people are dipping into savings to sustain consumption is probably slightly exaggerated." The new figures also gave a somewhat brighter picture of the nation's lagging productivity. Real output per hour worked grew at an average annual rate of 3.2% between 1969 and 1979, instead of the 2.9% previously estimated.

Carter Administration officials were quick to read the new numbers as evidence that the economy is not as bad off as it has been described to be by Ronald Reagan. Said Charles Schultze, the chairman of the Council of Economic Advisers: "Apart from the higher interest rates, the Reagan Administration is actually inheriting an economy that is strong. The U.S.'s current account balance is at near record levels, oil imports are falling, and investment has never been higher."

The Administration's upbeat tone was reflected in key areas of the economy last week. Wells Fargo and Chase Manhattan reduced the prime rate they charge their best corporate customers from 21% and 21.5%, respectively, to 20.5%. Although only a few banks lowered their rates, it was the first fall in the prime since late July, when the key interest rate started careering upward from 11%. Just that modest drop, though, was enough to send Wall Street into a rally, as the Dow Jones industrial average soared 21.59 points in one day. The stock market has been beset by fears that the record high interest rates would lead to a new and sharp recession. But the Wall Street rebound was short-lived, and the Dow Jones rose only another eight points to close the week at 966.38.

Retailers last week also received some unexpected Christmas cheer. Early holiday shopping had been very sluggish, as wary consumers looked for bargains. But in the last days of Christmas shopping, consumers suddenly got the spirit of the season. Stores that cater to the carriage trade did especially well. Sales at the tony Neiman Marcus stores in Texas were up 23% as compared with last year. During the last week before Christmas, Neiman Marcus sales on some days were as much as a million dollars more than projected. Middle America's retailers, however, did not do as well. Stores for price-conscious shoppers, such as K mart, J.C. Penney and Sears, are expected to show sales gains of only 2% to 3% during December after discounting inflation.

Despite the end-of-the-year cheer, experts warned that the fundamental state of the economy remains poor. Inflation, the underlying cause of the U.S.'s economic troubles, continues unabated. Figures released last week showed that consumer prices in November rose by an extra 1%, or at a compounded annual rate of 12.7%. Food and beverage prices rose 1.1%, with the cost of sugar and artificial sweeteners going up 7.9%. Gasoline and housing costs rose moderately, but they are expected to start moving up sharply in the next few months. Mobil, Exxon and Standard Oil of Indiana announced last week that they are raising wholesale prices for gasoline and home heating oil by as much as 2-c- per gal. following the latest rise in OPEC prices. Banks are expected to keep mortgage rates high, even though the prime rate has dropped slightly.

The economy is likely to remain sluggish as long as interest rates are in double digits, and money experts do not anticipate that the Federal Reserve will permit the rates to drop rapidly. Few economists expect a repeat of the 1980 experience, when interest rates rose to 20% in the spring but then fell to 11% in the summer. Said Irwin Kellner, chief economist of Manufacturers Hanover Trust: "The decline in the prime is a hope, rather than an actuality." Lawrence Kudlow, chief economist of the Bear, Stearns investment banking firm, still believes that the prime interest rate will rise to 25% by February. Said he: "The economy is stronger than people think, but a lot of the expansion is inflationary, not real. Fears of new inflation and credit demands from both the Government and the private sector will drive up interest rates."

The leading victim of the high cost of credit in 1980, the American auto industry, received grim news last week: the U.S. in 1980 fell into second place in car production. The new leader is Japan, which built 11 million autos and trucks, 40% more than the U.S.'s 7.8 million.

The industry's sick man, Chrysler, last week continued to fight for its life, as it formally submitted a request for an additional $400 million in federally guaranteed loans. The United Auto Workers union reluctantly agreed to negotiate up to $600 million in wage concessions with the stricken company, but the union is expected to ask for some nonwage concessions. Chrysler decided to extend the Christmas holiday closings of five assembly plants for an extra week and to reduce production of its new K-cars, thus laying off another 2,880 workers indefinitely.

Meanwhile, the incoming Reagan Administration, which will inherit these economic problems in less than a month, is beginning to tone down its economic rhetoric. The suggestion by David Stockman, the newly appointed budget director, and New York Congressman Jack Kemp, that Reagan should declare a national economic emergency to prevent a "G.O.P. economic Dunkirk" may be quietly dying. Arthur Burns, former Federal Reserve chairman and a sometime Reagan adviser, said it would be "unwise" for the new President to initiate any sweeping new measures. Stockman is now staying out of the public eye amid reports that other Reagan officials found his advice intemperate; Kemp last week said that the memo's use of the word "emergency" has been misinterpreted. "Something has to be done about the growth of budget expenditures, but this is not to be confused with Franklin D. Roosevelt's bank holidays," Kemp cautioned.

While 1980 ends in uncertainty and confusion, the new year will start with an unpleasant certitude: higher taxes. Social Security taxes will rise sharply in 1981. The rate paid by both employers and employees will increase as of the first paycheck in the new year from 6. 13% to 6.65%. At the same time, the income cut-off for Social Security taxes will increase from $25,900 to $29,700 in 1981. This means that the maximum Social Security tax for individuals will jump from $1,587.67 to $1,975.05. This will increase the total tax load on Americans next year by $40 billion. To businessmen and consumers already suffering from staggering interest rates and stunning price tags, the tax increase will be an auspicious beginning for the new year. --By Alexander Taylor. Reported by William Blaylock/Washington and other U.S. bureaus

With reporting by William Blaylock

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