The present recession differs from any the country has previously experienced in two critical respects. In the past, recovery was initiated by businessmen restocking their shelves, and then sustained by government policy.
This time, business inventory seems to be involved not at all, and government policy is immobilized. So there is no automatic bounce-back from the hard times ahead.
Business inventory played the lead part in all the typical recessions of the past. Businessmen tended to pile up stocks at a time when the economy was slowing down. Caught out, they dumped inventory and thus precipitated recession. Usually they oversold and had to restock their shelves in a hurry. The buildup of inventory set in motion the typical recovery.
The last recession provides a particularly striking example. There was a fall-off in Gross National Product from $1.2 trillion in the fourth quarter of 1974 to $1.1 trillion in the first and second quarters of 1975. By the third quarter, GNP had climbed back over $1.2 trillion and the recovery was under way.
Underlying that swing was a far more dramatic move in inventory. In the fourth quarter of 1974, businessmen accumulated nearly $7 billion worth of stock. In the first quarter of 1975, they dumped $19 billion worth. The sell-off continued at a slower pace in the second quarter. By the third quarter, businessmen were building inventory again -- the action that kicked off recovery.
Later in the year, the federal government followed through with a small tax cut and an increase in government spending. Similar actions took place after the recession of 1960-61. At other times there was an easing of tight money. Thus, in general the built-in-inventory bounce-back, which ended each recession, was further fostered by stimulative government action.
In the present recession inventory has played a negligible role. Businessmen -- burned by the 1974-75 recession and subject to almost constant predictions of more trouble ahead -- have been careful not to overstock.
Thus in the third quarter of 1979, while the economy was moving forward at a healthy clip, inventory grew by $7 billion. In the fourth quarter, while the economy was still expanding, accumulation was only $1.4 billion. In the first quarter of this year, when the decline started, inventory stood still.
There may still be some unloading of inventory as the recession advances later this year. But stocks are in good balance with demand, so there does not seem to be in the works any hasty inventory bounce-back to set recovery in motion.
The lead part played by business investors in past recessions is being played this year by consumer sales. Consumers eased off on purchases of expensive, or big-ticket, items such as homes and cars in the middle of last year. The latest statistics reveal that retail sales fell sharply in February and March of this year. Unlike the inventory recessions of the past, the recession of 1980 is a sales recession.
Theoretically, government stimulus could push consumers into a more expansive mood. Higher benefits for unemployment and for medical and food costs make money available for other items. Lower interest rates make purchases of homes and cars more attractive. But this time around, government policy has its hands tied by inflation.
The Consumer Price Index is rising at an annual rate of 18 percent. No doubt much of that comes from special one-shot items such as oil, which doubled in price last year. But even without the special items, the core rate of inflation -- the rate at which businesses have to increase prices to meet fixed costs -- is advancing at about 10 percent annually.
Only two months ago the Carter administration declared all-out war on inflation. It put forward a revised, and supposedly tight, budget and went along with much higher interest rates. Moreover, it did not include any significant moves to restrain wages and prices by direct action.
Any step toward stimulus now would have a devastating effect. The Consumer Price Index would probably take off. The core rate of inflation would hold. The next bout of inflation would start from a base of 10 percent. wWorse still, there would be confirmed the impression of an administration that didn't know its own mind, that moved in fits and starts, zigs and zags in a roller-coaster pattern.
So the country now heads into a recession with its fingers crossed. It can hope that inflation will come down. It can hope that interest will follow the decline. It can hope that consumers will forget about saving again and resume their purchase of homes and cars and other goods. But that is scant consolation if people lose jobs, local governments come under increasing pressure, desperate people become more desperate and the fabric of American society wears thinner and thinner.