The chairman of one of the nation's largest banks said yesterday that he does not see how the economy can break out of the vise of recession and high interest rates any time soon.
"I'm not very optimistic in terms of the second half of the year or the near future," said John McGillicuddy, chairman of Manufacturers Hanover Trust Co.
McGillicuddy said at a luncheon meeting with reporters that neither consumer spending nor business investment is likely to get the economy back in gear. He said that the consumer, whose renewed buying traditionally ignites the first stage of an economic rebound, "put his hands in his pocket and will keep them there."
In McGillicuddy's bleak scenario, business failures will increase in the months ahead as companies run out of ways to cut costs further, but must continue to pay high interest, which they cannot pass along in higher prices because of the decline in inflation and the low level of demand for goods and services.
When prices were rising at a double-digit pace--as they were in 1979, 1980 and the first part of 1981--consumers were impelled to buy goods to avoid future price increases. Now, he said, the consumer "doesn't have the inflation stimulus and hears bad news in abundance. . . . They've moved from fear of price increases to fear for jobs."
McGillicuddy noted that business spending on plant and equipment is substantially below estimates and is slowing further. Overall, U.S. businesses are operating at about 70 percent of capacity, but in some major industries such as steel, automobiles and construction they are operating at less than 50 percent of capcity.
"If you're operating at 50 percent of capacity, why would you want to spend money to add another 10 percent?" he asked.
He said the nation's economic malaise is in large part because of the federal government's burgeoning deficit. When the Reagan administration took office, it promised a stable monetary and a stable fiscal policy, McGillicuddy said. He said that the Federal Reserve has maintained the stable monetary policy needed to fight inflation, but the administration and Congress haven't "been able to provide a sound fiscal policy."
When President Reagan was inaugurated, he talked about a balanced budget in the fourth year of his administration, the bank executive noted. Now the outlook is for deficits measured in hundreds of billions of dollars. He said Congress and the administration must reexamine the spending and taxing policies of the federal government.
McGillicuddy called for further cuts in defense spending and slowdowns in the rate of growth of "indexed" benefits in entitlement programs such as Social Security and railroad retirement. The president has said that changes in the Social Security program are off limits, but McGillicuddy--echoing a recent statement by an ad hoc group of former Cabinet officials and the heads of most major Wall Street firms--said these programs represent the biggest growth portion of the budget and must be reexamined.
He also called for new "revenue enhancements" such as tax increases or fees for certain services provided by the federal government to users at no cost today. He said he would wait to see what economic conditions are like next year before making any decision to delay or repeal the third stage of the three-year, 23 percent tax cut passed by Congress last year. The second stage of that cut took effect the first of July.