A recovery from the nation's longest and deepest recession since the 1930s should begin sometime soon. Inflation and interest rates are finally down enough to get one going, according to almost every forecaster in the business.
Getting it going fast enough to produce a real improvement in the economy could be another matter. And, in any event, it hasn't begun yet. Employment data for December released Friday indicate economic activity was still falling last month.
The problems and risks facing the economy are enormous. The unemployment rate was 10.8 percent in December, with more than 12 million people out of work and another 8.3 million forced to work part-time or so discouraged they have stopped looking for work. More than half of the unemployed have been out of work for more than 10 weeks, while the average duration of a spell of unemployment has climbed to 18 weeks.
Meanwhile, businesses are still going bankrupt at a swift rate, and the federal government is contemplating a budget deficit approaching $200 billion.
None of the cold economic statistics, however, can convey a sense of the human tragedies occurring across the land as homes and farms are lost to foreclosure and shantytowns of migrant and penniless job-seekers rise outside cities such as Denver and Houston.
Still, the forecasters believe a recovery is on the way. Rising retail sales, new housing construction and defense spending are expected to provide the impetus for renewed economic growth. But business investment is falling as corporate executives contemplate the huge amounts of idle production capacity and long-term interest rates that are still remarkably high compared to the level of inflation.
A large and rapidly widening trade deficit--largely the consequence of an overvalued American dollar and recessions in many of the countries that buy U.S. goods--is also hurting recovery prospects.
Looming over everything is the possibility of a major international financial crisis that could devastate world trade and create true depression conditions in some nations.
Even the most optimistic forecasters believe the recovery this year will be distinctly below par compared with other postwar economic rebounds. Surprisingly, the Reagan administration has turned distinctly conservative in its forecasts, projecting such slow growth in the first half of 1983 that many industries and areas of the country would hardly notice it's underway.
In most of the forecasts, including that of the administration, unemployment falls with agonizing slowness. It is generally expected to stay above 10 percent all of this year and above 9 percent for all of 1984.
Only a few forecasters, such as Citibank, are sufficiently optimistic about economic growth that they expect joblessness to drop more rapidly.
Much of the good news in prospect is the result of the significant decline in interest rates since last July. The lower rates are the direct result of a change in Federal Reserve policy in which the central bank chose to ease financial pressures in an economy close to the ragged edge rather than stick to its restrictive money growth targets.
The key to the course of the economy lies with interest rates, just as it has since the recession began in July 1981.
In the first half of last year, continued high interest rates kept clobbering the economy. With the cost of consumer credit so high, the 10 percent cut in personal income tax withholding July 1 failed to produce the widely expected surge in consumer spending. High long-term rates caused cuts in business investment, too.
When spending did not pick up on schedule, businesses that had increased production in anticipation that it would were forced into another round of inventory cutbacks that helped send unemployment to record levels.
Now, forecasters profess great uncertainty about what the Federal Reserve will do next. Will the Fed breathe new life into the money growth targets at some point even if interest rates were to rise as a consequence and perhaps slow down or halt the recovery? Or will it continue to try to keep interest rates low to foster recovery even if money growth is substantially above target and the possibility of higher inflation that could mean?
Many of the policy makers at the Fed probably do not know how to answer that question. The relationships between the various measures of money and the economy took some strange and still unexplained turns in 1982--with more money not associated with more economic activity. That fact, plus new rounds of deregulation of financial institutions, forced the Fed to change its operational techniques for influencing financial markets. As one official there puts it, "There are more uncertainties than certainties at this point."
Fed officials, like those in the administration, do not expect to be troubled by a booming economy any time soon. They generally regard the dangers of continued recession as far greater than the small possibility that an overly rapid recovery could set off a new inflationary spiral.
"People keep asking, has the Federal Reserve caved in," says a high official there. "That is not the question. The risks are greater that we will not get much growth than that we will get too much. A little flurry would not hurt our inflation prospects."
The administration is predicting that the economy will be growing at about a 4 percent rate in the second half of 1983 after a much slower first half. If growth got up to the 6 percent or 7 percent range later this year, there is so much slack in the economy that "it wouldn't hurt anything" in terms of inflation, the Fed official believes.
Other Federal Reserve officials may not take quite as sanguine a view of potential inflation problems, but they agree on where the risks lie.
At the November meeting of the Fed's policy-making group, the Federal Open Market Committee, a staff forecast for 1983 was made. It projected "quite limited" growth in the next few months and only moderate growth after that.
Some members of the committee said there was a possibility the recovery could go faster, but, the minutes of the meeting note, "many members continued to stress that there were substantial risks of a shortfall from the projection."
While there are signs a recovery could begin soon, the committee members went on to say that they are "still quite tentative and could easily be reversed, with highly adverse consequences for the economy, if interest rates were to rise significantly from current levels," the minutes say.
That attitude is probably the best guarantee that the United States, in fact, will have a recovery this year.
The Fed is hoping that the repeated cuts in its discount rate--the rate Federal Reserve banks charge on loans--which have lowered short-term interest rates substantially, will soon produce lower long-term rates, too.
The spread between short- and long-term rates is quite wide, making it expensive for investors to keep their money in short-term instruments. Normally, the spread would shrink under these conditions.
But these are not normal times. For one thing, the country has never before experienced such a long recession or one that came on the heels of such a prolonged bout of inflation. For another, the imbalance between federal government revenues and spending has never been so great except in wartime. Certainly there has never been the prospect of budget deficits equal to 4 or 5 percent of the gross national product even after a recovery was well under way.
Simply put, no one knows how record federal borrowing, a revival of credit demand in the private sector and a Federal Reserve policy whose guidelines have become uncertain will together affect interest rates.
Some forecasters believe both short- and long-term rates will decline slowly over the coming year. Others expect some firming once recovery gets going. A few others, including those at Citibank, talk about an interest rate "spike" in the next few months.
The sheer uncertainty about the budget outlook also could help keep interest rates higher than they otherwise would be. Neither the administration nor financial analysts yet know the shape of the fiscal 1984 budget that President Reagan will submit to Congress Jan. 31.
Some economists fear Congress will virtually ignore the document while drafting alternative proposals that Reagan might or might not accept, as happened last year. A long, drawn-out struggle over the budget could boost interest rates by increasing uncertainty, the analysts warn.
But suppose that all does go well this year, that there is no interest rate or inflation rebound, that the year-end spurt in auto sales continues and that mortgage money is both cheap enough and readily available in the spring to keep the housing recovery moving ahead. In such a world, the last cut in tax withholding at mid-year ought to have more of an impact on consumer spending than the previous step did six months ago.
After some further inventory reduction this quarter, production of a wide range of goods would begin to rise steadily, if not spectacularly. Many basic industries, such as steel, coal and nonferrous metals, will see their recoveries delayed as business investment continues to fall for at least two or three more quarters in the best of circumstances.
Other industries heavily dependent on foreign markets or on the capital goods market, such as electrical and nonelectrical machinery, won't bounce back quickly, either.
Even in those sectors that do resume growth soon, financially strapped corporations, many of which pared employment to the bone in the second half of last year just to stay afloat, are likely to rehire workers at a snail's pace.
Unemployment thus easily could continue to rise for a few months after the recovery begins, topping out somewhere above 11 percent. And the rate just as easily could be still close to 10.5 percent a year from now.
Of course, the longer unemployment stays high and the use of existing production capacity low, the more downward pressure there will be on inflation. Between the fourth quarters of 1981 and 1982, consumer prices rose only an estimated 4.7 percent. Except for the blip that will result from raising the federal gasoline tax by a nickel April 1, there is little reason to expect that rate to go up very much.
Rather, the forecasting "risk" is that inflation will be lower than that rather than higher, a number of economists say.
Inflation has indeed been brought down, but at an enormous cost, a cost that is still being paid in terms of people without work and machines standing idle. The cumulative loss of output has reached far into the hundreds of billions of dollars already.
The question for the policy-makers now is whether any actions can be taken that will reduce the sizable risk that the recovery will stall again once it gets under way. A broad group of economists has reached a consensus that the single most important step toward that end would be to reduce prospective budget deficits for 1985 and later years.
Lower deficits would mean lower interest rates, given any reasonable rate of growth of the money supply. Less borrowing by the government should make more capital available for the private sector. That availability, coupled with the lower rates and the investment tax incentives passed in 1981, would probably lead to more investment--the long-run key to a growing, relatively noninflationary economy.
However bright that longer-term horizon might appear, for the next few months the outlook can only be described as dismal. More unemployment, more bankruptcies, more foreclosures, more scrambling by local, state and federal governments to try to close budget gaps and, above all, more uncertainty about what the future will hold.