Needed: More Get Up and Go

By John Greenwald

Business leaders and politicians have been complaining for months that the Federal Reserve's high-interest-rate policy could push the U.S. into a recession, but Federal Reserve Chairman Alan Greenspan has steadfastly maintained that rates must be kept up to hold inflation at bay. Last week Greenspan blinked. In testimony before the Senate Banking Committee, he acknowledged for the first time that many banks are causing a credit crunch by being overly stingy in granting loans. As a result, Greenspan said, the Federal Reserve may act to "offset" the credit tightening by engineering a "modest" drop in interest rates.

On Wall Street, investors greeted the circumspect statement with nearly unrestrained joy. Greenspan's remarks helped send the Dow Jones industrial average up 37.13 points on Thursday. The Dow briefly touched 3000 on Friday before closing at a record 2980.20, up 75.25 for the week.

The hint of lower interest rates helped ease fears that the 7 1/2-year-old economic expansion, which has slowed to an anemic annual rate of less than 2%, might groan to a halt. The government offered further reassurance last week when it reported that retail sales rose a healthy 0.5% in June, after falling for three straight months. At the same time, the Producer Price Index, which measures the wholesale cost of goods, rose just 0.2% in June, indicating that inflation is under control.

Despite the heartening figures, many consumers and companies across the U.S. remain mired in the economic doldrums. The gloom is particularly deep in the troubled Northeast, which has been reeling from tight credit and downturns in everything from computers to construction. In Massachusetts the unemployment rate has surged from 3% in 1988 to 5.8%. Meanwhile, the securities industry has laid off 45,000 employees, or about 10% of its work force, since the 1987 crash. The hard times caused home sales to slide 15% in the Northeast last year. "It's hard to see how things could get terribly much worse in the region," says Samuel Hayes, a professor at the Harvard Business School.

Other parts of the country are also feeling a pinch. Cutbacks in defense spending have slowed the jaunty California economy. Defense contractors such as Lockheed, Northrop and McDonnell Douglas may dismiss as many as 20,000 of their 125,000 workers by year's end. And California agriculture, the state's largest industry, is suffering through the fourth year of a severe drought. "There's no engine of growth in sight," says Larry Kimbell, director of the Business Forecasting Project at the U.C.L.A. School of Management. "In the past, one sector after another took the lead in sustaining the economic expansion. But we currently see no such activity on the horizon."

The slow growth has taken a heavy toll on many industries. Ford, Chrysler and General Motors idled 45 of their 62 U.S. and Canadian plants for up to four weeks in the first half of 1990. Along with the closings, the Big Three have laid off or fired 38,000 workers. "Manufacturers are very cautious," says Stanley Gault, chairman of Ohio-based Rubbermaid, a leading maker of household products. "The economy is just hobbling along."

The weakness has caused many companies to put away their help-wanted signs. U.S. firms created only 660,000 new jobs in the first half of the year, a 50% drop from the first six months of 1989. The dearth of new positions was matched by a corresponding decline in the number of job seekers. In a worrisome trend, 900,000 discouraged people stopped looking for work in the second quarter, an increase of 20% over the previous three months.

One of the few bright spots for U.S. corporations has been a surge of exports. With the growing appetite for American goods, foreign sales of products as varied as minivans, jetliners and health-care products in the first four months of 1990 climbed 8.9% above the figure for the same period last year. The strong performance offset a 4.8% rise in imports and helped cut the U.S. trade deficit from its peak of $152 billion in 1987 to a current annual rate of $92.2 billion.

Amid such crosscurrents, many economists hope that the White House and Congress will make substantial progress in their talks on shrinking the budget deficit. While the proposed $50 billion reduction could dampen the economy in the short run, many experts argue that a smaller deficit would reduce the danger of rising inflation and encourage the Federal Reserve to let interest rates fall. "I would have preferred to see the deficit attacked earlier, when + the economy was stronger," says Lyle Gramley, chief economist for the Mortgage Bankers Association and a former Federal Reserve governor. "But we ought to take the risk of doing what is needed for the long-run health of the economy now."

For the present, most economists predict that the expansion will reach its eighth birthday in November and continue at about a 2% rate through 1991. But that is cold comfort for many people. "The real issues are stagflation and stagnation," says David Hale, chief economist of Kemper Financial Services. "Instead of long unemployment lines, we're going to see increased frustration and resentment over stalled growth and incomes."

Four years ago, the expansion seemed in imminent danger of coming to an end. But then a combination of rising exports and resurgent consumer spending helped give business a needed lift. A cut in interest rates might now keep things rolling.

CHART: NOT AVAILABLE

CREDIT: TIME Chart by Steve Hart

CAPTION: STUCK IN THE MIRE

With reporting by Gisela Bolte/Washington and William McWhirter/Chicago