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<text id=90TT3495>
<link 91TT0345>
<link 90TT0395>
<title>
Dec. 31, 1990: Recession:How Long Will It Last?
</title>
<history>
TIME--The Weekly Newsmagazine--1990 Highlights
The American Economy
</history>
<history>
TIME--The Weekly Newsmagazine--1990
Dec. 31, 1990 The Best Of '90
</history>
<article>
<source>Time Magazine</source>
<hdr>
BUSINESS, Page 36
How Long Will It Last?
</hdr><body>
<p>A TIME panel forecasts a moderate recession for the next six
months but warns that a banking crisis or Middle East
conflagration could trigger a deeper slump
</p>
<p>By JOHN GREENWALD -- With reporting by Bernard Baumohl/New York
</p>
<p> Hardly anyone bothers to deny it. After a record eight years
of peacetime economic expansion, the most widely predicted
recession in recent U.S. history is finally at hand. No longer
confined to the beaten-down Northeast, the slump has brought
hard times for many Americans, ranging from Boston bankers to
Atlanta autoworkers to California aerospace engineers. The big
questions now: How far will the economy slide into misery, and
how long will the slump last?
</p>
<p> The tidings will probably be grim at least until the middle
of next year, according to the consensus of a panel of five
leading economists who gathered in Manhattan this month for a
TIME economic forum. "We have a moderate, potentially severe
recession on our hands," said Allen Sinai, chief economist for
the Boston Co. Economic Advisers. "The economy is showing signs
of caving in, almost falling off a cliff, as so often is the
case once a full-fledged recession begins." If the conditions
seem particularly bleak, he noted, "that is because we are in
the heart of the slide."
</p>
<p> The U.S. gross national product will shrink at an annual
rate of 2.5%, after adjusting for inflation, in the fourth
quarter, and show smaller declines in the first half of next
year, according to TIME's panel. (The economy grew at an anemic
1.4% rate in the July-September quarter.) The downturn would
meet the official definition of a recession, which is at least
two straight quarters of falling GNP. The panel said the U.S.
appeared likely to resume slow growth by mid-1991 as the Federal
Reserve Board lowers interest rates to stimulate business
activity. That scenario would amount to a far milder recession
than the severe 1981-82 downturn, which lasted 16 months.
</p>
<p> But that is if everything goes well, which is no sure thing.
The economists in the TIME forum warned that the U.S. faces a
minefield of unprecedented risks that could worsen the recession
and prolong it through next year and beyond. Chief among them
is the threat of a drawn-out war in the Persian Gulf. That could
push the price of oil, which closed at $25.92 per bbl. last
week, well past the $41.40-per-bbl. peak that it hit in October.
Another serious threat is the possibility of a crisis in the
U.S. banking system, which is awash in bad loans and
increasingly reluctant to lend more money. L. William Seidman,
chairman of the Federal Deposit Insurance Corporation, told
Congress last week that 1991 is likely to bring the failure of
180 banks with total assets of $70 billion. That would reduce
the FDIC fund, which insures bank deposits, from an already weak
$9 billion to $4 billion by the end of next year. Seidman urged
lawmakers to levy a special $25 billion assessment on banks and
raise their insurance premiums to rescue the fund.
</p>
<p> The U.S. economy is also especially vulnerable to shock
waves from overseas. A panic in Japan's superheated real estate
market would shake Japanese lenders and help trigger a global
slump. So could the chaos that would ensue if the Soviet Union's
restive republics plunge that country into civil war.
</p>
<p> The Federal Reserve last week sent the clearest signal yet
that it has become deeply worried about the slumping economy.
In an eagerly awaited move, the Fed cut the so-called discount
rate it charges for loans to banks a half-point, to 6 1/2%. The
reduction, which was the first change in the discount rate since
February 1989, was meant to encourage balky banks to lower their
lending rates to consumers and companies. But most major banks
refused to budge. Only First National of Chicago, the 13th
largest U.S. bank, cut its prime rate a half-point, to 9 1/2%.
</p>
<p> Economists in TIME's round table generally viewed the
recession as the latest and most painful reaction to the 1980s
borrowing binge. They noted that the U.S. has been plagued for
the past two years by what Sinai called "subpar, anemic, punky
and kind of crummy business activity" as debt-ridden consumers
and companies cut back their spending. Iraq's invasion of Kuwait
in August provided the final push. "We were headed toward a
cul-de-sac in which the economy was going nowhere," said David
Hale, chief economist for Kemper Financial Services. "What we
have had is a deep shock to confidence on top of a sluggish
economy."
</p>
<p> The jolt caused consumers to snap shut their wallets and
purses just as the peak spending season arrived. In a November
poll of consumer attitudes, the Conference Board found Americans
to be less optimistic about the economy than at any other time
since 1982. The gloomy mood translated into a drop of 0.1% in
retail sales during November, compared with the previous month.
"This is not a temporary response to temporary events," said
Donald Ratajczak, director of the economic forecasting center
at Georgia State University. "It is, rather, a call by
consumers that they feel their earning potential is weaker."
</p>
<p> For many people, the pain has been building for years. When
adjusted for inflation, the median weekly income of U.S.
families has stagnated since 1988. The government reported last
week that Americans' real disposable income showed no growth in
November. Declining home values have deepened the ache by
reducing people's wealth and thus their willingness to go
shopping. Real consumer spending dipped 0.2% in November,
despite the start of the Christmas buying rush.
</p>
<p> Companies had been slashing their payrolls to become more
competitive even before the latest round of consumer
retrenchment. The pace of layoffs quickened in November when the
economy lost 267,000 jobs and sent the unemployment rate to
5.9%, up from 5.7% the previous month. Since June, nearly
700,000 Americans have been added to the jobless rolls. While
past recessions were heavily concentrated in blue-collar
industries, few sectors or regions have been spared this time.
Manhattan's Citicorp, which laid off 3,600 employees this year,
said last week that it plans to dismiss another 4,400 by the
end of 1992. Citicorp, the largest U.S. banking company, said
it may lose as much as $400 million in the current quarter,
largely because of a $340 million addition to its reserves
against bad loans.
</p>
<p> TIME's panel of economists predicted that unemployment would
climb to nearly 7% by late next year as U.S. industry continues
to dismiss workers to keep profits from plunging into a free
fall. Caught between huge debts and tough foreign competition,
companies in the Standard & Poor's index of 500 stocks saw their
earnings drop 3.7% in 1989. They will fall another 2.2% this
year, Sinai predicts. "More important than the decline in
consumer confidence is the decline in business confidence," said
Gail Fosler, chief economist for the Conference Board, a
business-research group. "That decline is palpably and
immediately translated into what we see going on in the
production sector." She warned that companies could trigger "a
very serious recession" if they cut payrolls too much in their
zeal to keep overhead and inventories lean.
</p>
<p> Gloomy executives are unlikely to start more factories
humming anytime soon. The government said last week that
companies plan to increase their spending on buildings and
equipment by just 0.4% in 1991, the smallest increase in five
years. But companies may decide to spend even less if the
economy becomes weaker.
</p>
<p> The panelists foresee a slowing of inflation, which climbed
to what would be nearly 10% on an annual basis in August and
September, if the gulf crisis can be resolved without a lengthy
war. Unlike the oil shocks of the 1970s, the latest price hikes
have not threatened to work their way into wage settlements --
largely because of the weak economy. "We have already had our
maximum inflationary impact from the oil shock, unless there is
another one," Ratajczak said. The government buttressed the
point last week when it reported that the Consumer Price Index
for November rose a moderate 0.3%, or 3.7% on an annual basis.
The TIME group predicts that the CPI will climb at an annual
rate of 7.2% in the fourth quarter and slow to 3.8% by late next
year.
</p>
<p> The panel expects falling inflation to set the stage for a
turnaround. As price increases slow, they contend, Federal
Reserve chairman Alan Greenspan will continue to permit interest
rates to drop. The average fixed rate for home mortgages has
already dipped to 9.6%, from roughly 10.25% last summer. A
general drop in interest rates would have a double-barreled
benefit. Besides stimulating business at home, lower rates would
tend to reduce the foreign-exchange value of the dollar, thereby
spurring U.S. exports.
</p>
<p> Yet tumbling interest rates will have little impact if banks
fail to ease the credit crunch that has frustrated borrowers for
most of the year. Beset by tough new regulations and saddled
with hastily made loans that went sour in the 1980s, many
lenders remain wary of granting credit to any but their
best-heeled customers. Said Rata jczak: "Regulators told the
banks, `Make no bad loans.' But the banks heard, `Make no
loans.'" Lenders have been just as reluctant to cut their rates
for business borrowers. As a result, the prime rate that most
major banks charge corporations has been stuck since January at
10%. "Banks are protecting their profit margins like crazy,"
said Carol Leisenring, chief economist for Core-States
Financial, a Philadelphia-based bank-holding company. "That is
not surprising, given the situation the banking industry is in."
</p>
<p> The TIME group warns that the banking industry's weakness
could prolong the economic downturn. Leisenring points out that
the FDIC has placed more than 1,000 of the nation's 12,700
commercial banks on its watch list of troubled lenders, because
of a mountain of bad real-estate loans and other debt problems.
"That is roughly four times the number on the list when we
entered the last recession," Leisenring said. "We don't usually
go into a recession with these kinds of loan problems and
stresses in the financial system." As a consequence, she said,
the U.S. "will not get the traditional kick from construction
activity" that normally helps lead an economic recovery.
</p>
<p> Some major banks are barely hanging on. Creditors of Bank
of New England Corp. offered last week to swap $600 million of
bonds for stock in a move that would infuse the firm with
desperately needed capital. The neighboring Bank of Boston
Corp., which lost $255 million in the third quarter, said it
expects to report another substantial loss in the fourth.
</p>
<p> The shortage of funds could grow more acute as Japan and
Germany throttle back their foreign investments. Beset by a
yearlong slide in prices on the Tokyo Stock Exchange, Japan's
giant banks and financial institutions have sharply reduced
their lending overseas. While Japan was a net buyer of $25
billion of U.S. securities and other assets in 1989, Japanese
investors will be net sellers of about $30 billion of U.S.
holdings in 1990. Said Hale: "Japan is no longer a source of
global asset inflation and global credit expansion. It is now a
source of restraint." At the same time, a unified Germany may
invest as much as $1 trillion over the next decade to rebuild
its eastern region. That will severely crimp the amount of
German funds available for foreign lending.
</p>
<p> A cash squeeze could help tip much of the world into a
recession. Britain, Canada and Australia are in a slump, while
the economies of most European countries outside Germany appear
to be faltering, according to the TIME group. "I see the
international economy slowing down," Fosler said, "which is
going to be an added burden over the next two years." Such a
slide could erode U.S. exports, one of the economy's few
remaining sources of strength. The government said last week
that the U.S. trade deficit widened in October to $11.6 billion,
the largest gap in nearly three years, as rising oil prices
pushed up the country's bill for imports.
</p>
<p> At home, the Bush Administration seems powerless to pull the
U.S. out of the recession. While Ronald Reagan's tax cuts and
$2 trillion military buildup helped end the last slump, the
resulting federal deficit makes new tax reductions or spending
increases politically and economically impossible. Even after
the October budget deal between the White House and Congress,
the federal deficit could swell to $300 billion in fiscal 1991
when the savings and loan bailout and the projected $30 billion
U.S. cost of Operation Desert Shield are factored in. At the
same time, some $25 billion of income tax increases and higher
levies on tobacco, alcoholic beverages and luxury items will hit
the economy in 1991 as a result of the budget agreement.
</p>
<p> While deficit cutting is good long-term policy, the
immediate effect is likely to be more pain. "We are raising
taxes in the teeth of a recession," Ratajczak noted. "I am not
sure that many people would call that a useful idea." Added
Fosler: "The budget agreement was very much like spraying
shrapnel. It was sort of an AK-47, as opposed to a target rifle,
in terms of its impact on the economy. Lots of sectors are going
to be paying higher fees and costs for public services."
</p>
<p> For now, Americans must scramble to cope with hard times and
keep up their hopes that the recession turns out to be no worse
than a moderate one. Yet the downturn could have a silver lining
if it forces Americans to confront the legacy of 1980s-style
borrowing and spending, which threatens to stifle growth for
years to come. "We simply cannot go on doing business as usual
in so intensely competitive a world," Sinai said. "This downturn
may be a catalyst that will wake up the nation." If the
recession does help inspire the U.S. to face its long-term
economic problems, hard times could help achieve what eight
years of debt-fueled prosperity could not.
</p>
</body></article>
</text>