It was supposed to be a “short and shallow” recession. But as the nation’s economic downturn heads into its llth month the Bush administration increasingly fears that the worst is yet to come. Last week the administration finally succeeded in getting the Federal Reserve and commercial banks to lower interest rates. Yet Washington’s warnings of a contagious global slump are angering U.S. trading partners-and increasing the suspicion that the administration is playing politics with the economy.
For the record, administration officials stick by their forecasts that the economy will hit bottom by summer. But privately, hopes for a post-gulf-war consumer boom have given way to gloom. White House chief of staff John Sununu voiced worries in an interview with The Washington Times that the recession might last long enough to cast a shadow over Bush’s 1992 re-election campaign, An aide to Treasury Secretary Nicholas Brady says, “A double dip’s the secretary’s obvious concern.” After meeting Brady last month, Deutsche Bank chief economist Norbert Walter concluded “that the administration really didn’t believe that the recovery would begin in the second half of the year.”
A double-dip recession still seems unlikely. The downturn of 1990-91 is not unusually long or deep as recessions go. Still, the end is nowhere to be seen. The economy shows scattered signs of prosperity: the unemployment rate dropped in April for the first time in a year, and the government’s leading index of economic indicators posted a gain. Yet key indicators, such as new orders for factory equipment, remain negative. Car and truck sales in late April ran 17.9 percent below the same period a year ago-and 1990 was no boom year. Personal income is simply rising too slowly to stimulate consumer spending. “We are still in recession,” says David Littman, chief economist of Manufacturers National Bank of Detroit. “When the recession ends in the second half of this year, the best we can hope for is 60 percent of the normal growth coming out.”
Bush and Brady are equally worried that tight-money policies abroad are damping demand for U.S. exports. That could have serious consequences: a pickup in exports accounted for 84 percent of U.S. economic growth in 1990. “Brady just thinks slightly greater monetary ease in Europe and Japan is healthy and poses no inflationary dangers " says Assistant Treasury Secretary Charles Dallara.
The administration has made an extraordinary effort to communicate that message. On a two-week European swing last month, Brady publicly urged lower interest rates-and angered the outspoken Karl Otto Pohl, head of the German central bank, by hinting to German commercial bankers that they, too, should favor easier money. The pressure on rates from Brady and his sometimes imperious deputy, David Mulford, had many European and Japanese officials irritated even before they convened to discuss the subject in Washington last week. Bush called the finance ministers and central bankers to the White House for a personal arm-twisting session but got nowhere: neither Pohl nor Bank of Japan governor Yasushi Mieno would budge.
They see no reason to. While the Japanese and German economies have slowed in recent months, both remain healthy. Japanese growth is still in the 4 percent range low for Japan, to be sure, but a boom by U.S. or European standards. In western Germany, unemployment is at an eight year low and wage increases are running above 6 percent. American fears of a global slump are not widely shared: last month the International Monetary Fund forecast that the industrial economies will grow only 1.3 percent in 1991 but will rebound to 2.8 percent next year. Besides, Germans recall that the last time they succumbed to U.S. pressure to be the world’s locomotive, in 1978, all that resulted was sharply higher prices at home. “The danger for Germany at the moment is inflation,” insists Eckard Pieske, an adviser to German Finance Minister Theo Waigel. “There is no indication that we are heading for a recession.”
Germany is keeping money tight to prevent inflation-but that policy is strangling the rest of Europe, which does not share in the growth spurt caused by German unification. French industrial production fell by more than 20 percent in the first three months of 1991. Italy’s unemployment rate is expected to rise to 11.5 percent. In hard-hit Britain, which has been in recession for more than a year, a new survey by the Confederation of British Industry sees more layoffs ahead. “We are still in quite a lot of trouble,” says CBI economist Douglas McWilliams. The French government has called for lower interest rates, and the Bank of England has cut its key lending rate by 3 percentage points since September. But most European countries have tied their currencies to the German mark; unless German interest rates fall, they cannot undertake dramatic interest rate cuts without a devaluation that would undermine economic confidence.
The administration has been more successful domestically, not least because Federal Reserve Board chairman Alan Greenspan (whose term at the Fed’s helm expires in August) must be sensitive to the political winds. Tuesday, after the ministers meeting in Washington refused the U.S. request to reduce interest rates jointly, the Fed did so on its own. Major banks followed suit, lowering the prime rate from 9 percent to 8.5 percent. Bush promptly thanked Greenspan for his “strong leadership role. "
The rate cuts were front-page news, but they may have little economic effect. The Fed’s discount rate, at which it lends to banks, fell from 6 percent to 5.5 percent, but the far more important Federal Funds rate, which banks charge for loans to one another, was lowered only half as much. “It’s a peculiar kind of easing when done through the discount rate rather than through Fed Funds,” says Bank of Montreal economist Lloyd Atkinson. “I take it as more symbolic than significant.” Interest-rate cuts are normally bullish for the stock and bond markets, but they reacted weakly to the Fed’s latest move.
The financial markets interpret the Fed’s hesitation as a sign that the central bank is worried about inflation-and they worry, too. Inflation-sensitive longterm interest rates have fallen far less than short-term rates. Those long-term rates determine the cost of home mortgages, business investments and the other major expenditures required to pull the economy out of recession. “The long rate is still too high to be a stimulant,” says New York economist Henry Kaufman. But Washington has no direct control over the price of 30-year bonds. That is up to the financial markets, and the markets are unlikely to accept lower bond rates until they are convinced that both the Fed and the administration are serious about fighting inflation. “Beating up on the Fed is not a way of getting long-term interest rates down,” says Scott Pardee, chairman of Yamaichi Securities in New York. “It would be much healthier for the market if the administration would be quiet and let the Fed do its job. Right now, there is a cloud over the Fed because of political pressure.”
The central bank has reason to be cautious. After a year of slow growth in 1990, the money supply has been increasing rapidly since January, providing the raw material for economic expansion. The effects are just beginning to be felt: the Fed’s latest “beige book,” containing region-by region reports on the economy, is far more optimistic than the January edition. The housing market is improving, the report finds, while “manufacturing shows signs of bottoming out in much of the nation.” Giving the economy an additional jolt now could well be overkill, leaving a legacy of inflation that would take years to wring out. Patience is prudent-even if the economy’s recovery doesn’t quite meet the administration’s schedule.
