Any lingering doubt about whether the nation was in the grip of a recession vanished last week in a barrage of dismal economic news.
Economists, busy revising their forecasts, were divided on estimates of how far the economy would drop. But they were unanimous in saying the recession would be much worse than they had been expecting.
In the opinion of some, 1980 could turn out to be the second-worst recession since the 1930s, surpassed only by the 1974-75 debacle. Alan Greenspan expects real economic activity to drop by "more than 3 percent" between now and the end of the year. Forecaster Larry Chimerine of Chase Econometrics echoed another Greenspan view when he said, "We believe that the major risks are still on the downside."
An economic decline that large would rival that of 1953-54, when output fell 3.3 percent but over four quarters. Most forecasters now predict the economy will fall only for three quarters this time, reaching the recession trough at year's end. If true, that could mean the 1980 drop will turn out to be steeper than that of the early 1950s.
Certainly the outlook is bleaker than for the "short and mild" recession President Carter was still talking about two weeks ago. His comments were based on the administration's latest official forecast, which was updated only six weeks ago. That forecast accompanied major new moves by Carter and the Federal Reserve to dampen inflation, including balancing the 1981 budget, controls on consumer credit and added restraints on bank lending.
Neither the administration nor the Fed wanted to tighten policy any further, but events in financial markets forced them to act. It seemed as if the economy would never quit and inflationary expectations never be reduced.
Reluctantly, policy was changed to squeeze the economy even harder -- on what now turns out to have been on the eve of the recession, a recession that clearly has been made worse by that last set of actions.
The initial reaction to those steps by many businessmen and financiall market experts was that the new restraints would make little difference either to economic activity or inflation. Within two weeks, however, the same people were feeling the pinch from the latest actions and were beginning to cry, "Overkill."
In retrospect, it now looks as if "overkill" might be the right word.
The Labor Department reported unemployment jumped from 6.2 percent of the work force in March to 7 percent in April, the largest increase since January 1975, when the nation was plunging into the worst recession in 40 years. Other reports indicated sharp drops in construction activity, auto sales, new orders for factory goods and business borrowing.
Even with the stunning rise in unemployment -- more than 7.25 million people were out of work last month -- economic policymakers believe they must stick with their antiinflation stance for now.
"No, I don't think we should make any policy changes now," one key adviser said after the unemployment news hit friday. "We can't afford to."
Inflation is still too high, the Carter men believe, to switch gears suddenly now.
If the recession is to be more serious than administration officials had wanted or expected, will there be an offsetting benefit in terms of a larger-than-expected drop in inflation? The cautious answer, "Probably."
But Carter and his advisers are in a more uncomfortable position than ever. As Alfred Kahn, the president's inflation counselor, put it last week, "The country now faces the dilemma we have so long feared, the twin ugly evils of accelerating inflation and the long-predicted recession."
The administration sought a mild recession for 1980 to try to prevent last year's surge in inflation, largely related to energy, from spilling over into bigger wage increases this year. If everyone tried to play catch-up, the Carter economists reasoned, it would push the nation's underlying rate of inflation to a new higher level that would take years to wring out of the economy.
During 1979, the rate of wage increase was remarkably steady, given the big jump in prices -- even if a more accurate measure of inflation, such as the deflator for personal consumption spending, is used instead of the consumer price index increases, which has been exaggerated by the way housing costs are treated. (See chart at right).
Most analysts, including those in the administration, have been expecting wages to rise more rapidly in 1980, at least a percentage point faster than last year. Now they are not so sure. In April, for instance, the Labor Department's hourly earnings index, regarded by many economists as the best measure of wage change, was up only 8.3 percent for the latest 12 months -- not much different from its level a year ago.
With the number of people out of work rising swiftly, employers may not have to increase their pay scales quite as fast to keep their present workers or to hire new ones. That could help reduce the rate of inflation later this year and in 1981. It also could lay the groundwork for a less inflationary recovery beginning next year, one administration economist pointed out.
But if the basic policy goal of preventing a wage acceleration seems likely to be achieved, the deepening recession naturally brings other troubles, including pressure to switch policy from restraint to stimulus.
Economists will be watching for any sign that consumers have switched from a spend-to-beat-inflation strategy to a more normal save-to-protect-yourself-from-hard-times approach.
Last year, the consumer's willingness to spend money provided unwanted strength to the economy -- unwanted in the sense that policymakers wanted to cool off economic activity to slow inflation. Now, one of the administration's concerns is that consumers may have swung unwelcomely far in the other direction.
Preliminary indications are that consumers cut back buying again in April for the third month in a row. However, officials wonder if part of that may not be due to a big reduction in credit card use in the wake of the imposition of controls on increases in credit extensions by lenders, a situation that could reverse itself quickly.
Meanwhile, the one area of relative strength in the economy -- business investment -- will be closely watched for any signs businessmen are scaling back their plans to buy new equipment or build new plants. "No signs of really significant weakness have appeared there," one Carter economist said.
The biggest difference between 1980 and 1974, however, is that there is now huge overhang of business inventories to be liquidated. As sales fall, forecasters expect inventories to decline, too, but not by large amounts.
The greatest risk that the recession will be even worse than the latest projections show lies in the unpredictable consumer. Should Americans really decide to retrench, it could be 1974-75 all over again, economists warn. r
Administration economists are counting on a sharp drop in inflation as measured by the CPI in the second half of the year to help head off such development. "Things will be going the right way there by July," said an adviser. In the meantime, the numbers will continue to look awful because of the recent big increases in mortgage interest rates and the impact of Carter's new oil import fee, which will raise gasoline prices about 10 cents a gallon at the pump.
But even if the CPI drops out of the double-digit range, the underlying rate of inflation will still be about 10 percent, other economists note. That probably will keep any movement toward stimulating the economy modest, even in an election year.
As Kahn said, it's a dilemma.