ARE WE LOSING ALTITUDE TOO FAST?

By John Greenwald

All the conventional rules of timing and location should make Barry Rutenberg's profitable homebuilding business especially robust these days. His Gainesville, Florida, company is in one of the fastest-growing parts of the fast-growing Southeast, and the spring buying season is under way. Money is easy: fixed-rate mortgages have fallen to 8.2% for a 30-year loan. But fewer people are poking through his developments, and Rutenberg recently sold a home for $208,000, at a loss of $24,000. "This was the first time I had to sell a home below cost this decade," he says.

If Rutenberg is taken aback, it is because some vital sectors of the U.S. economy have slowed more sharply and swiftly than experts predicted just a few months ago. No one expected the galloping 5.1% growth in last year's fourth quarter to continue, of course, particularly since the Federal Reserve has jacked up interest rates seven times since February 1994. Most economists thought the hikes could reduce growth to a more sustainable 2% to 3% this year and thereby create a "soft landing" that would forestall inflation. But some forecasters now fear that a far more painful pullback could be at hand. "The slowdown is very clear and quite dramatic," says Laurence Meyer, an economic consultant in St. Louis, Missouri. "The question now is whether all this is a prelude to a recession."

The abrupt drop in business activity reflects the concerns of newly tightfisted consumers, whose spending makes up two-thirds of all U.S. economic activity. Gone is the pent-up demand for autos, houses and other big-ticket items that helped make last year's growth the fastest in 10 years. Many consumers, whose installment borrowing rose to a record $928 billion in February, today are more concerned about repaying those debts than about not owning a newer, better dishwasher. At the same time, an increase in unemployment from 5.4% in February to 5.5% in March has deepened workers' anxieties. "Corporate layoffs are far from over," says Meyer. "They generally accelerate when firms find themselves in an economy that is weakening."

Yet not everyone seems worried by these danger signs. Detroit's Big Three automakers plan few production cutbacks in the second quarter, even though U.S. car and light-truck sales slumped 4% through March compared with the same period a year ago. Downplaying the slow start, Chrysler chairman Robert Eaton says he still expects to sell 100,000 more vehicles in 1995 than the 2.2 million units his company sold last year. Notes David McCammon, vice president and treasurer of Ford, which has been adding shifts at its factories: "If we thought things were doing poorly, we would not be producing at 114% of capacity."

But all these vehicles will head toward showrooms at a time when dealers must increasingly rely on rebates and other promotions to move them off their lots. "We're doing our best to keep the volume up by discounting, working on referrals and calling back customers," says Paul Spiegel, manager of a New York City dealership that sells Cadillacs, Buicks, Chevrolets and Geos. Such tactics can put dealers in a vise. "The Fed's rate hikes have dampened the ability of many Chevrolet customers to buy that new vehicle," says Bill Wolf, owner of Wolf Chevrolet/Geo in Belvidere, Illinois. "But it's difficult for a dealer to lessen the effect of the hikes by discounting much further, because there isn't that much profit left."

Homebuilders too are relying on incentives to help boost sagging sales. Although housing starts have fallen for three straight months, including a jolting 8% drop in March, the market remains glutted with unsold new homes. So Kaufman & Broad, the largest builder in California, last week began offering mortgages that require no down payments on homes priced up to $315,000. The company unveiled the plan after reporting that its first-quarter profits plunged 95%, to just $435,000, compared with $8.8 million in the same period a year ago. "It's a tough market," says marketing vice president Jeffrey Charney. "That's why we took our gloves off."

Sellers of used houses are also fretting. John Tuccillo, chief economist for the National Association of Realtors, says the market "fell apart" as mortgage rates rose above 9% last fall, and still has not recovered. Tuccillo expects 1995 sales to plunge as much as 7% below last year's level of 3.9 million homes. Declares Thomas Carroll, president of AmeriSpec, which franchises 265 offices throughout North America that inspect houses before they are sold: "This whole thing about a soft landing is nonsense. The problem is that low mortgage rates are not bringing in buyers." Especially when people remember that 18 months ago rates were 6.9%.

Nor is anyone spending much in the stores these days. Retail sales fell 1% in February before recovering a scant 0.2% in March. Despite that uptick, Federated Department Stores, which owns Macy's, Bloomingdale's and other chains, said its March sales declined 2.5%. "The big kickoff in women's and children's clothing that normally begins at Easter didn't happen this year," notes John Ronzetti of the National Retail Federation. Wendy Red, a partner in a chain of 15 stores in the Washington area called Up Against the Wall, says sales of skirts and shorts have been dismal. "I've got 2,500 pairs of shorts in stock, and by last week I had sold only 500," she says.

All this means that production in U.S. mines, factories and utilities, which fell 0.3% in March, will probably continue downward and thus increase unemployment. "Manufacturing activity is fading fast," says Allen Sinai, chief economist for Lehman Brothers, who recently raised his estimate of the chances of a recession to 1 in 10 from 1 in 20.

Part of his concern reflects the collapsing U.S. dollar, which hit a new low against the Japanese yen again last week. The decline threatens to increase U.S. inflation, which is still a quiescent 3%, by driving up the price of imports. And the slightest whiff of higher inflation could put pressure on Fed Chairman Alan Greenspan to jack up interest rates, which would make dollar-denominated securities more attractive to investors and thus strengthen the currency.

But such a move could tilt the economy into a recession. "This is a most inopportune time for the Fed," says John Hsu, chairman of his own investment and consulting firm in New York City. Which could be another way of saying Greenspan, often considered the second most powerful man in Washington, might be feeling a bit like the most powerful man, Bill Clinton: a little diminished these days.

--Reported by Bernard Baumohl, Sribala Subramanian and Jane Van Tassel/New York and Joseph R. Szczesny/Detroit

With reporting by BERNARD BAUMOHL, SRIBALA SUBRAMANIAN AND JANE VAN TASSEL/NEW YORK AND JOSEPH R. SZCZESNY/DETROIT