With interest rates shooting up, big business is obviously going to think twice about aggressive capital expansion. This means the consumer, our chief economic spark plug during the business recovery of the past three and a half years, must continue to be reasonably robust spender to keep the 1979 economy out of hot water. Without him - and he's the biggie, representing two thirds of the entire gross national product (GNP) - a recession, perhaps a severe one, would seem a certainty. Considering the consumer's record debt, his low savings, and the fact that his increase in personal income (up a tiny 0.5 percent in September) is barely managing to keep pace with inflation, there's clear cause for concern. Has the beleaguered consumer, in fact, run out of gas? And, therefore, is the '79 economy in deeper trouble than anybody imagines?
For some thoughts, I rang up Albert E. Sindlinger, who has been polling consumer attitudes the past twenty-three and a half years. His outlook was grim. Based on his latest findings (1,300 different hoouseholds are surveyed each week), the outspoken seventy-one-year-old pollster concludes that gains in consumer income have now peaked out (largely due to inflation) and, more ominously, that this income will begin to slide precipitously in the face of sharply rising unemployment. Accordingly, Sindlinger looks for retail sales growth to decline markedly throughout '79 - from a gain of some 11.5 percent in January to a rise of just under 3 percent in July and then on to minus territory at year-end. The end result: A consistently deepening '79 recession in which nearly 2.8 Americans - half the number that joined the labor force over the past year - will lost their jobs in the next six months.
A recession is generally defined as two consecutive quarters of negative growth in the gross national product. Sindlinger's scenario is much worse - four straight quarters of declining GNP next year, beginning with a 1.5 percent falloff in the first three months. He sees this followed by a 2.5 percent decline in the second quarter, 3 percent in the third, and 3.5 percent in the fourth. Please note, this is a decidedly contrary view, since most economists are forecasting 2 to 3 percent growth in the '79 GNP - although there has been a bit more talk of a recession in view of the recent credit tightening actions to defend the dollar.
But Sidlinger tells me his latest polls show consumer gloom accelerating - with anticipation of declining income, fewer jobs, and worsening business.
The reason: "It's inflation," says Sindlinger. "Because for everything the consumer buys every day, prices continue to rise - and it's going to get worse." He predicts that the consumer price index will climb from its recent 9.6 percent rate in September to a wicked 12.5 percent in May. Actually, ominous inflation forecasts are nothing new - but Sindlinger's is especially alarming when he relates it to the impact on sayings. Just listen to this:
Nearly a quarter of the U.S. households, 23 percent, no longer have any savings at all. Five years ago, The figure was less than 9 percent.
Four of every ten American housholds are now living off their savings, more than double the rate of five years ago.
In January of 1977, commercial bank savings grew at an annual rate of 16.5 precent; more recently, 8.6 percent - nearly a 50 percent drop in less than two years.
Through much of the 1960s and the early 1970s, about 80 percent of the $6.5 billion of monthly pension benefits to pension-fund holders and social security recipients went into savings. Now, in a dramatic reversal, 80 percent of the benefits (which have since swelled to $7.5 billion a month) are going instead into checking accounts to meet bills.
"We've been living off the fat [savings], but now we're chewing on the bone [credit]." bellows Sindlinger. "So how the hell is the consumer going to carry the ball for the economy in '79?"
Maybe he can't, but he's currently giving a darn good account of himself. Retail sales were up a brisk 11.5 percent in September, housing is strong, and there's a continuing fair-sized demand for autos. And healty auto and housing figures are not the stuff of which recessions are made.
Sindlinger's response: "That's hedge buying to beat out inflation. But our surveys show every major consumer item has peaked except cars and houses. And they'll peak too before this year's over."
Alas, more grim news, Normally, slowing business sharply curtails interest rates, and, in fact, during the 1974-75 recession, the prime rate (the bank's lending rate to its best customers) tumbled rapidly from 12 percent in September of '74 to 7 percent in March of '75. Not this time, says Sindlinger. His reasoning: (1) heavy government demands for funds to finance the federal deficit (which carries a whopping $48 billion in interest payments alone on total federal of $753 billion); (2) the Federal Reserve Board's anxiety to protect the dollar by keeping interest rates high, thus encouraging heavy foreign investments in the U.S. Sindlinger's chilling and unbelievable forecast for the prime rate: a record 16.5 percent by the end of next May. His equally chilling market outlook: a 20 percent drop in the Dow Jones Industrials into the 600s in the same period.
I asked Sindlinger if he thought the world was coming to an end. Thank goodness, he said no. "But we need a recession so we'll stop spending more than we make," he says. "We've got to get rid of $50 billion of federal spending . . . which we're not going to be able to do. So we're in for one hell of a credit crunch, a 'money confidence collapse'" as Singlinger calls it, where, he says "almost everybody will be short of funds."
God, I'm vulnerable too, I thought. Maybe I shouldn't renew my subscription to Fortune.
Speaking of doomsayers, I was in San Francisco a few weeks ago and ran into on eof my favorite people - "Crash of '79" author Paul Erdman. Would you believe he cheered me up with some happy economic talk? No, Erdman wasn't backing away from his dire forecast. He was simply postponing his doomsday script until 1981: One reason was Jimmy Carter's apparent success at Camp David, meaning, says Erdman, that "obviously he's not a total failure and will now be given a second chance." The other: The dollar has been sorely tested in the last three months, indicating, he says, "more resilency in the international dollar-based system than I had expected."
I felt pretty good. After all, a two-year reprieve is certainly better than nothing.
Well, Erdman, I'm sorry to say, is now having second thoughts about postponing that financial collapse, due, by the way, in less than five months - next March 19, to be precise, according to the book. Why the change of heart? For one thing, an ominous warning from former Saudi Arabian oil minister Sheikh Adullah Turaiki that oil prices from the Organization of Petroleum Exporting Countries (OPEC) could jump as much as 15 percent next year - putting renewed and dangerously heavy pressure on the dollar. Even more disturbing, he says, is Carter's recent anti-inflation speech - "an absolute flop." His reasoning: "I watched the man, and for the first ten minutes he seemed to be apologizing that his program probably wouldn't work. And it seems the best he's hoping for is to get inflation down to only seven percent. Big, bloody deal . . ." Erdman argues that voluntary wage-price restraints simply won't work because there's so strong authority behind them.
Where does this leave us all? With that March 19 blowup, says Erdman, a wholesale flight from the U.S. dollar - first abroad and then here. It'll be a panic, he says, brought on by the creation of a financial Frankenstein - that explosive $600 billion Eurodollar market (the amount of U.S. dollars held by people and institutions overseas) . . . "those crazy, unwanted dollars floating around the world that can only keep growing in number because of Carter's inability to solve the energy problem and to stop inflation."
Who knows? Maybe I ought to cancel my Wall Street Journal, too.