Searching for the Recovery

By WALTER ISAACSON

With the recession easing, so are tensions over a jobs bill

Like the first fragile buds of spring, tentative auguries of economic revival appear to be breaking through the depressed national economy. The indicators are maddeningly mixed, and business leaders are wary of overreacting until they see whether a consistent pattern emerges. But for the first time since the recession began in mid-1981, higher levels of production and of new orders were reported in January, according to the monthly survey of 250 industrial companies by the National Association of Purchasing Management. There was also good news from the National Federation of Independent Business: it said that the hiring plans of small firms are at a three-year peak. As Charles Lee, an economist at Chicago's Northern Trust bank, cautiously notes: "The beginning signs of a turnaround are quite favorable."

The unemployment picture is still bleak, however, and congressional leaders of both parties remain eager to pass an emergency jobs and relief bill. After two weeks of secret talks, the White House last week worked out a tentative agreement with House Democrats on a short-term plan to speed up public works projects and provide aid to those hardest hit by the recession. There will, no doubt, still be bitter battles ahead over more ambitious proposals for long-term jobs programs and the budget. But the compromise was an important symbolic sign of bipartisan cooperation.

Demand for durable consumer goods, such as furniture and appliances, is one of the most evident early indicators of a possible economic recovery. "We are seeing it," confirms Frederick Starr, president of Thomasville Furniture Industries in North Carolina, whose new orders in January were 35% higher than a year ago. "If this keeps up for another four or five weeks, we'll look at changing our production plans." But like most businessmen, Starr wants to watch and wait a while longer: "This thing may not last. Everyone's concerned about the strength of the recovery."

The renewed demand for big-ticket items has bolstered many retailers. Consumer installment credit has expanded considerably since the beginning of November. Sears, Roebuck reported a surge of major purchases in the final quarter of last year that has continued through January. "It is clear to us that the recovery in durables and home furnishings has started," says Edward Brennan, chairman of the chain.

With average mortgage rates at just under 14%, the lowest level in 27 months, there has been a revival of home sales and construction. "Everybody's encouraged because sales are increasing and the phones are ringing," says Ray Baxter, president of the Houston Board of Realtors; home sales there increased 24% last month over December.

High-technology companies, some of which avoided the worst of the recession, are also pacing the nascent recovery. National Semiconductor, a giant California firm that has been a voice of pessimism during the past year, in recent weeks has rehired one-fourth of the 600 workers it laid off at a Salt Lake City factory and is running large want-ads in San Jose, Calif. "From talking to customers, there is more enthusiasm," says Company Spokesman Michael Ayers. "We think things are picking up, and 1984 will be a gangbuster year."

Even some of the nation's deeply depressed basic industries were showing signs of life, although very faint ones since their problems stem as much from foreign competition as from lack of demand. U.S. Steel has rehired 2% of its labor force, but that still leaves only 42% of its workers on the job. "There have been a couple of blips, but we don't see signs as yet that this is a basic recovery," says Spokesman Andy Stursky. In Detroit, auto executives predict that 1983 sales will be 10% higher than those of 1982, which was the worst year since 1961. "Ten percent better than terrible is still terrible," says General Motors Chairman Roger Smith.

Both parties fully realize that the prolonged economic hardship has been, and still is, the nation's most important political issue. It cost the G.O.P. the 1982 midterm elections, and threatens to make Reagan a one-term President. Yet the White House has been relatively adroit lately in reducing the Democrats' ability to exploit the issue. The bipartisan compromise on Social Security blunted one Democratic attack. Last week House Speaker Tip O'Neill conceded, in a public statement, that Reagan had "kept his promise" to move promptly on a jobs measure. Thus, despite serious reverses and anemic poll standings, Reagan remains a very active player in the grand political game.

Reagan's compromise with O'Neill arose out of a confrontation during a short ceremony in the Oval Office two weeks ago, when the Speaker challenged the President's criticism of "make-work" measures. O'Neill made an emotional pitch for aiding jobless workers with useful public works programs. As the discussion grew heated, Budget Director David Stockman interjected that the two leaders were not all that far apart.

After the session, Reagan's aides urged him to authorize discussions with O'Neill on such proposals. Later that day Reagan cornered the Democratic leader at a meeting with Congressmen in the White House family theater to promise that Stockman would work on a package. Reagan later characterized the huddle as "just two Irishmen plotting."

The secret discussions bore fruit last Thursday in a meeting in the Speaker's office that included O'Neill, Stockman, Democratic Whip Thomas Foley, Majority Leader Jim Wright of Texas and Presidential Aides James Baker, Richard Darman and Kenneth Duberstein. The $4.3 billion package, which will create only 125,000 new jobs, contains less than first meets the eye. It is mainly the acceleration of scheduled projects, and thus involves only about $700 million in new spending. But from a symbolic standpoint, it allows the Democrats to claim a victory for the jobless while allowing Reagan to meet the charge that he is insensitive to economic hardship and the issue of the fairness of his economic policies.

The Democrats made it clear that the agreement did not prevent them from pushing for further antirecession legislation or opposing the President's budget and tax plans. "This is a first step, which does not bind anybody," said Foley. For that matter, Republicans too were pushing ahead with plans for further unemployment relief. "Even with a resurgent economy, we're going to have persistent unemployment," says Congressman John Erlenborn of Illinois, who has been appointed by the G.O.P. House leadership to come up with a broad jobs package.

In putting together their program for reducing the enormous budget deficits that Reagan has projected, House Democrats have generally agreed that the third-year installment of Reagan's 1981 income tax cut, a 10% reduction due to go into effect in July, should be repealed, or at least limited to $700 per taxpayer. But of the eight top House Democratic leaders, one of the most powerful considered it unwise to fight the third-year cut: Ways and Means Chairman Dan Rostenkowski of Illinois. In a speech on Tuesday, he made his disagreement public. He proposed a "freeze on scheduled tax reductions effective Dec. 31, 1983," a move that would leave the July cut intact. To O'Neill, it appeared that Rostenkowski was pre-empting the Speaker's role as leadership spokesman. He called a meeting the next day and tore into his once loyal lieutenant. "You made me look like a fool, Dan!" O'Neill thundered.

Reagan's political strategy will succeed only if the public sees tangible evidence that his on-the-mend optimism is warranted. But even if the economy rebounds strongly, the country will still face staggering deficits. Indeed, a sudden and too robust economic revival could strangle itself by pushing interest rates back up as the Government and industries compete for loans. This concern was echoed last week in an unusually forceful report by the Congressional Budget Office. "The American economy faces unprecedented risks in the years ahead," said the report, "unless the Federal Government takes measures to narrow the gap between tax revenues and spending."

The President has already enjoyed great success in the crucial fight against inflation. Wholesale prices fell in January by a full percentage point, the largest drop in the 36 years that the statistic has been compiled. In order to make comparable strides against future deficits, he will have to cut spending, notably for defense, and raise revenues. His plan for a standby tax increase, which he wanted Congress to pass this year for possible implementation in fiscal 1986, was criticized by leaders of both parties. If Reagan fails to forge an agreement over taxes by midsummer, the chance of a bipartisan approach will evaporate in the frenzy of the approaching 1984 campaign, when both cutting spending and raising taxes become political shibboleths. And with it could vanish hopes that the buds beginning to sprout around the country will bloom into a sustained recovery.

--By Walter Isaacson. Reported by Laurence I. Barrett and Neil MacNeil/Washington

With reporting by Laurence I. Barrett, Neil MacNeil This file is automatically generated by a robot program, so viewer discretion is required.