So far it has been a strange recession.
Unemployment rates have yet to rise at all, though more than 100,000 persons have been laid off in the automobile industry and its suppliers, such as steel and glass makers.
Interest rates are way beyond the point at which, in time past, they would have sucked all the lendable money away from mortgage lenders and stopped homebuilding in its tracks. Yet mortgages are still being made and housing starts, while down somewhat, are still running strong.
In the face of record 13-plus-percent inflation rates and major energy jolts, consumers have been surprisingly slow to reduce the pace of their spending, except for automobiles. Remarkably, recently they have even managed to save a bit more and reduce the proportion of their income going to repay past debt.
"So far the recession's in the statistical tables, but it's not yet on the kitchen table," observed Arthur Okun, the Brookings Institution economist.
It will show up on the kitchen tables, too-- eventually. The problem is, the economic news is full of cross currents, and predicting just how far employment may rise or what the inflation rate might be in the next year or so is a tricky task.
Even with all the layoffs in the automobile industry, in July the unemployment rate still stood at only 5.7 percent, a scant 0.1 percentage point above its low for the period of economic expansion. Most analysts expect the August number, due out Friday, to be higher, but only by another tenth or two.
Consumers, in the second quarter this year, were able to keep making purchases while spending slightly less of their total income, albeit while taking on significantly large amounts of new installment debt. As a result, the nation's personal savings rate rose to 5.4 percent in that three-month period, compared to the unusually low 4.7 percent level of the fourth quarter of last year.
Though the amount of consumer credit outstanding went up significantly, incomes were rising fast enough that debt repayments as a portion of monthly personal income dropped below 15 percent in June to a level similar to that of most of 1978. Surveys indicated then that most consumers were reasonably comfortable with that debt load.
Nevertheless, most incomes have been falling farther and farther behind surging prices, and retail sales have been dropping. By July, after adjustment for inflation, retail sales were 7.0 percent lower than they were last December.
At the same time, record high interest rates have not clobbered new housing construction as usually happens in recessions, primarily because new money market certificates have allowed thrift institutions to pay high enough interest to hold onto most of their deposits. Mortgage money is still available, though it costs up t0 12 percent in some places with large loan fees to boot.
But now there is a rising backlog of unsold new and used homes that should mean fewer housing starts in the months ahead. Slower sales of existing homes will also make it harder for owners to realize some of the huge capital gains they have been racking up in recent years, gains that have been a major factor in the ability of many consumers to keep on buying and buying.
Higher interest rates also have not stopped businesses from finding funds for new investments in plants and equipment.The Conference Board, a business research organization, reported last week that the 1,000 largest corporations in the country earmarked $21.4 billion in the second quarter for such investments. That was a 5 percent drop from the first quarter, but still up 42 percent from the second quarter of 1978 and the second highest amount on record.
So what does it all add up to? A recession, say most forecasters, though with a note of caution in their voices.
"It's very clear that the economy is not declining at an accelerating pace, which would be normal at this stage of a recession," said Beryl Sprinkel of Chicago's Harris Bank. "We are in a holding pattern."
Okun, who is a former chairman of the Council Economic Advisers, said flatly. "The recession is here, but it still is a gradual slide. My guess is that it will get worse."
Added Alan Greenspan of Townsend-Greenspan & Co., another former CEA chairman, "As far as I'm concerned, we have a recession out there. It's coming."
The most significant indication that a recession is under way, of course, is that the gross national produce -- the total of all goods and services produced in the economy -- declined, after adjustment for inflation, at an annual rate of 2.4 percent in the second quarter. Even though the actual test for a recession is more complex, in popular terms two consecutive quarters of a decline in real output have come to be considered a recession
But Greenspan, for one, questions the meaning of the second quarter decline and believes that later revisions might come close to wiping it out. His reasons, however, also lead him to think that a more traditional, steeper recession is on the way.
One of the puzzles this year has been why employers have not cut back their work forces by stopping new hiring and laying off present employes. After all, output, as measured by the GNP, was falling in the second quarter at a time payrolls were still expanding. Greenspan thinks that part of the answer is that output, in fact, was not falling that much, and that the additional goods that were produced went primarily into business inventories.
If so, business may have to face the prospect of reducing inventories as sales fall further in coming months. In previous post-war recessions, it has been inventory liquidations that have caused the economy to slump sharply, as it did in late 1974, for example.
If businesses only stop expanding their stocks, they must at least keep ordering new merchandise at a rate equal to what they currently are selling to their customers. But if they want to reduce stocks, they must stop new purchases altogether while supplying customers from the goods on hand. Factory orders fall and layoffs occur until inventories get back in better balance.
"Right now there's a heck of a rapid rate of inventory investment," noted Okun. "This looks like a situation that is the forerunner of an inventory liquidation that could be substantial . . . Then we would have something with a pretty standard shape of a postwar recession."
"Three months from now, I bet layoffs have jumped far enough that they are front page stories," he added.
Greenspan, whose intricate models of the economy produce, among other things, a monthly estimate of GNP, thinks there is a good chance that output will rise this quarter. Should that happen, the question of, is it a recession? will be asked over and over.
Beyond that, however, Greenspan thinks the economy will contract sharply for a couple of quarters as a result of that wing in inventories.
Some other forecasters, such as Otto Eckstein of Data Resources Inc., expect only a modest inventory correction with no quarters coming close to actual liquidation. As a result, Eckstein's forecast has a markedly different shape than that of Greenspan or Okun.
Eckstein predicts there will be smaller drops in output this quarters and next and very slow growth for the first half of 1980.
Whatever the shape of the next few quarters, there is complete agreement that unemployment will be rising above 7 percent during 1980. Said Okun, "It should go up a couple of points over the year."
Some economist, including Walter Heller of the University of Minnesota, think it could come close to 8 percent, perhaps even pass it. Even some Carter administration economists have warned top policymakers that 8 percent is possible.
One percentage point on the unemployment rate is equal to about 1 million people without jobs.
As a monetarist, Sprinkel of Harris Bank, approaches his forecasting chores with quite a different approach. But looking at changes in a variety of measures of the money supply. Sprinkel said, can offer a possible explanation for what seems to be happening to the economy.
From the end of 1977 through early fall of 1978, he explained, the different measures were growing at annual rates of from 8 percent to more than 10 percent. Then from November 1978 through last March, the growth rates dropped sharply. Since March, he declared, "We have had an explosion of money."
Sprinkel wonders if those slow money-growth months might not have fostered the economic slowdown of the first half of this year, which has since been reversed by the "explosion" of money that began in April.
Whatever the case, Sprinkel is convinced that the Federal Reserve will continue to raise interest rates-- as it has been doing in recent weeks-- until it slows growth of the monetary aggregates once more. That will bring on a full blown recession, Sprinkel said.
The ultimate question about how severe a recession faces the nation probably depends upon how business changes its investment plans in the face of declining sales. So far, orders for capital goods are holding up quite well. If that continues, it's probably that the recession will be mild. If those orders evaporate, it could be much worse.
The major surprise in 1974, Greenspan recalled, was "how fast those firm capital goods orders disappeared."
Mild or severe, the recession is sure to have some impact on inflation. With the passing of the shock of this year's huge oil price hikes, better performance on food prices, and sufficiently slack labor markets to prevent most workers from playing a full game of inflation catch-up in their wages, the price picture could look a lot better a year from now.
Consumer prices should be rising at a rate somewhere between 7 1/2 percent and 9 percent late next year, according to most forecasters. That would be a clear improvement over this year's 1 percent a month, but as the rate after a recession it is still extraordinarily high.
Right now, an optimistic forecaster is one who thinks both unemployment and inflation would be running at a 7 1/2 percent rate a year from now.