Gloomy Holidays--and Worse Ahead
Not for many years has a Christmas season begun with so many tidings of spreading discomfort and lack of joy about the U.S. economy. Already racked by a devastating double-digit inflation, the nation is now also plunging deeper into a recession that seems sure to be the longest and could be the most severe since World War II. Consumers who a few weeks ago worried mostly about rising prices now fear for their jobs and incomes as well. For many Americans, the Yuletide will be a time of less elaborate meals, infrequent parties, fewer and cheaper presents.
All last week the bad news mounted. The auto industry reeled from a new-model sales rate 35.8% below last November's already somewhat depressed pace. Ford and Chrysler announced massive new layoffs for this month. Automakers now plan to close at least 14 assembly plants and put as many as 230,000 production workers, clerks, accountants and executives out of work before Christmas, and about 20% of General Motors' 500,000 U.S. employees will be idle in January.
But the decline is no longer confined to autos and home building, which is down 33% from early 1973, as it has been for most of this year. In classic fashion, the recession* has begun to work its way through the entire economy. Although demand for home freezers is still high, with housewives stocking up on food to beat rising prices, sales of other major appliances--TV sets, washing machines, dryers, vacuum cleaners--are turning sick, and layoffs are spreading in the plants that make them.
Blue Christmas. General Electric last week announced the sixth in a series of production cutbacks that have slashed the 23,000-man payroll at its sprawling Appliance Park in Louisville by about 50% since August. Even sales of some processed foods are shaky: General Foods will close a Jell-O and puddings plant in Dover, Del., for seven days at the end of this month while it works off heavy inventories.
For retailers, Christmas 1974 may be black rather than just blue. Department stores and retail chains normally count on ringing up about 25% of their annual sales in the weeks (four this year) between Thanksgiving and Christmas, but they may be unable to do so this year. While retail sales rose 7% in dollars over the past year, that was equivalent to a drop in real terms once the impact of inflation was discounted. Several big chains, among them F.W. Woolworth and W.T. Grant, have suffered steep declines in third-quarter profits; at the biggest of them all, Sears, Roebuck, earnings fell 29%.
Anticipating thin shopping crowds this season, stores are cutting down on part-time sales help and even committing the unheard-of act of promoting pre-Christmas bargains, such as brand-name $14 shirts for $6.99 in Boston. Korvettes discount department stores in Manhattan are offering scrip worth $ 110 in merchandise to customers who bring in $100 in Christmas Club checks. Chicago's Montgomery Ward chain, which has an unusually high inventory of unsold goods, has decided to bring back last year's energy saving and cut down on costly Christmas lighting displays.
The grim mood is evident in the talk of business and Government leaders.
Henry Ford II last week called the auto industry's slump a "depression" and warned that Washington had better take quick action to help the unemployed.
Federal Reserve Board Chairman Arthur Burns warned of a possible "permanent decline of our nation's economic and political power" unless the Administration takes more vigorous action to curb the flow of wealth into oil-country treasuries. House Speaker Carl Albert offered an unnerving defense of the costly program that his fellow Democrats are talking up to help out faltering corporations and unemployed workers: "Someone said this is digging up F.D.R.'s New Deal. What if it is? It [the New Deal] got us off the soup lines, didn't it?"
Sideways Waffling. Even Treasury Secretary William Simon, the Administration's chief economic spokesman, conceded that the recession "probably" (he could well have said certainly) will be the longest that the nation has suffered since World War II.
And President Ford scheduled a press conference early this week at which he is expected to admit that the slump has worsened more rapidly than he foresaw when he submitted his 31 -point economic-policy package to Congress in October. He is likely to express special concern about the plight of the auto industry and to announce that he has asked his economic advisers for new ideas on how to fight recession--without giving up the battle against inflation, which the President still views as "Public Enemy No. 1" and, indeed, as the primary cause of recession.
But the Administration is at least easing up a bit on its budget-cutting drive, the centerpiece of its anti-inflationary strategy. The President last week proposed reductions of $4.6 billion in planned federal spending, which would hold total expenditures this fiscal year to $302 billion, v. the $300 billion that he had earlier proclaimed as his goal. All but $1 billion of the cuts require legislative approval that a Democratic Congress is unlikely to give; they include such politically sensitive proposals as a reduction of $1.2 billion in federal grants to states for Medicaid and other welfare programs, cuts veterans' education benefits, and a $325 million rise in the cost of food stamps to families that qualify for them. Even if the White House gets everything that it is asking from Congress, the budget would still be $9 billion in deficit, but Administration officials are concerned that a tighter squeeze would damage an already weak economy. Says Roy Ash, director of the Office of Management and Budget: "The economy can change faster than the budget."
It certainly can--and has. Though the economy has been drifting down all year, the slide has been so gentle for so long that the Nixon and Ford Administrations felt it possible to deny that the nation was in a recession at all. As recently as October, Commerce Secretary Frederick Dent asserted that the economy was only going through a period of "sideways waffling." Now, though, the slide has suddenly become something more like a nosedive--by some measures, the worst since the 1930s.
Key economic indicators were already peaking out in November 1973, when the Arab oil embargo and energy crisis finished off the 1971-73 U.S. boom.
So the recession has already lasted a full year, and most economists believe that it will go on for at least another three or four months. That would easily break the longevity record for the five previous post-World War II recessions--13 months in 1953-54.
No Confidence. During the most severe of the postwar drops, the recession of 1957-58, real gross national product--that is, total output of goods and services measured in dollars of constant value--fell 3.9%. It dropped in the third quarter of this year at an annual rate of 3.6%, and Administration economists calculate that it is now going down at a 4.5% to 5% rate. The only postwar recession record that is not yet certain to be broken is unemployment. In the first postwar recession, in 1948-49, the jobless rate peaked at 7.9%; in a total civilian labor force of 62.2 million, 4.9 million men and women were out of work. In October this year, the unemployment rate rose to 6%, and 5.5 million members of a labor force that now numbers 92 million are looking for jobs. But layoffs are increasing so rapidly that Secretary Simon predicts 7% unemployment next year, and there is a bitter outside chance that the 1948-49 record will be matched or broken by late 1975.
The current recession has also shown a greater capacity to frighten the public than any of the previous postwar downturns. The next report of the University of Michigan's respected Survey of Consumer Confidence, due this week, will show the deepest pessimism about the economy since the survey began in 1946. The business-financed Conference Board, which polls 10,000 households on the economy every two months, also finds consumer confidence at an alltime low; its "confidence index" plummeted 30% in September-October alone. The latest Gallup poll, conducted just before
President Ford departed on his Far Eastern trip, found that 72% of those surveyed saw worse economic times ahead, up from 68% in August.
Some consumers are so alarmed that they are muttering about a return of the Great Depression of the 1930s. Those fears are exaggerated to the point of unreality and betray a dimming of memories of just how nightmarish the 1930s were. Between 1929 and 1933, unemployment surged to 25% (it was still 10% on the eve of World War II), industrial production plunged by more than 53% -- compared with 2% in the current recession so far -- weekly wages fell 33%, and corporate profits disappeared alto gether. Not even the most pessimistic economists foresee anything remotely comparable to that catastrophe.
Still, there are good reasons to be more frightened by the current recession than by its predecessors. It has been combined with a horrifying rate of inflation -- 11.5% in the third quarter -- unmatched in any previous downturn or in fact in most booms. The easy optimism of the 1960s, when economists and politicians thought that they knew how to cure recessions quickly, has vanished.
In those days, it was assumed that a massive increase in Government spending and an outpouring of money by the Federal Reserve Board would soon get production and employment moving up again. Now, such a strategy would probably push prices up even faster.
Fat Farmers. Inflation has also magnified the pain of recession, producing a squeeze tighter than anyone in the 70% of the U.S. population who is under 45 has experienced before. The downward drift in the economy over the past twelve months has been paralleled by the longest and steepest sustained slide in stock values since the bear market of 1969-70. Since January 1973, the Dow Jones average of 30 blue-chip industrial stocks has declined by 41%, while the broader-based New York Stock Exchange Composite Index has fallen even further, by 43%. Shares of companies in autos, airlines, chemicals, paper, packaged foods and other indus tries are trading at mid-1950s prices or lower. The plunge has savaged the for tunes of the 32 million Americans who own stock directly and the scores of mil lions of others who have a stake in the market through pension funds and prof it-sharing and retirement programs.
At the same time, the value of wages and salaries is being shrunk by inflation. Last year's average 8% inflation rate was tolerable because incomes in creased even more. But this year, for the first time since World War II, "disposable" income -- what families have left over after they pay their taxes and other public fees -- has actually fallen, if only by 1.5%. Workers in some unions that have won fat pay increases this year have managed to stay ahead of today's inflation. Yet the only broad sector of the economy that is clearly doing well nowadays is composed of the nation's 10 million farmers. Although the fact has been obscured by the well-publicized protests against low beef and poultry prices, grain farmers have been doing better than any single part of the U.S. economy outside of the oil industry. Farm profits are likely to come close to $27 billion this year; while that is a substantial drop from last year's $32 billion, it is still a fat 54% above the $17.5 billion the farmers got in 1972. Because profits are strong, farm real estate has been booming. Values rose 30% or more in the past year in a dozen states in the East, Midwest and Great Plains.
Although the recession's reach grows almost day by day, its effects have spread unevenly over the nation's social and economic landscape. Unemployment is heaviest in the industrial Northeast and the Far West; it is well below the national average in the South, in the Midwest farm belt and in the ore-and resort-rich Rocky Mountain states. Colorado's zero-growth advocates see no harm in the fact that recession has trimmed the number of new jobs in the state from 65,000 in 1973 to about 1,600 this year.
As the epicenter of the auto industry's disaster, Detroit has been struggling with the nation's highest urban unemployment rate: 11.8%. Although its streets are decorated for Christmas, and stores, bars and restaurants are busy, an almost palpable anxiety hovers over the city and its gilded suburbs. For the moment, Motown's local economy has been saved from real damage by a system of auto-industry supplemental unemployment funds that allows most laid-off workers to continue to receive 95% of their base take-home pay; but those funds could run out within six months. Out in suburban Bloomfield Hills and Grosse Pointe, meanwhile, auto executives gloomily ponder the prospect that normally generous year-end bonuses will be painfully thin this year. Says one Ford executive: "If there's no bonus, we'll have to scrape."
Detroit's city government is already scraping. A rise in crime is putting added burdens on the police force, while greater demands are being made for social services. Yet the rash of layoffs is expected to carve at least $10 million in city tax revenues out of the municipal budget, and Mayor Coleman A. Young worries that Detroit may have to ask for outside aid. Says he: "Our city's problems are only a harbinger of what the nation will soon be facing."
Some other cities are learning to cope with unemployment at or close to 10%; among them are San Diego, hit hard by the collapse in construction; and Elkhart, Ind., whose mobile-home manufacturing industry has slowed down sharply. While New York City agonizes over its 7.4% unemployment, Seattle is content with its 6.9% because 15% of its aircraft-centered labor force was out of work in the 1969-70 recession. Chicago and Cleveland, both diversified with several still healthy industries, including steel and heavy machinery, are skating by the slump with less than 5% joblessness--though even in Chicago, unemployment-compensation offices have been jammed lately.
White-collar employees are finding the current recession particularly unnerving, because companies are no longer as reluctant as they once were to furlough them. Chrysler has laid off 20,000 clerks, accountants and lower-level managers; Sears has let more than 200 executives and middle-management workers go in the past several weeks. Many big corporate employers have quietly frozen new hiring and are trying to whittle their staffs through attrition. At the same tune, employees are less eager to reach for early retirement at a tune of soaring inflation. The Chicago office of the Booz Allen executive recruiting firm has been receiving close to 400 unsolicited letters from job seekers each week, up from about 125 a week in less jittery times.
Having learned a lesson from previous recessions, employers have been hanging on to machinists, welders, engineers, chemists, metallurgists and others with hard-to-come-by skills that they will need when business picks up again. But unskilled youths find job prospects so poor that they are joining the Army in greater numbers than expected, quieting the Pentagon's fears of last year that the ranks could not be filled once the draft ended. Recruitment rose 3,100 over forecasts during the fall, and would-be enlistees are flocking in so fast that the Army is raising its acceptance standards.
As always, nonwhites have suffered the most from the recession. Herbert Hill, who is in charge of labor affairs at the National Association for the Advancement of Colored People, says that unemployment among the black population in some major cities is approaching 30% or even 40%. Says Hill: "For the black community, this is a full-scale depression. Many of the gains that we have made over the past ten years are being rapidly eroded." At the same time, community-action-program funds are drying up.
Los Angeles Poverty Worker Roland Atkins, 33, has a familiar complaint: "Every time I apply for a job in a community agency these days--and I apply for everything--I'm competing with Ph.D.s and people with master's degrees. Ph.D.s will work for $500 a month, money they wouldn't look at before. Now, the man on the bottom has to compete with people with lots more education, and he's getting knocked out of the higher paying jobs."
Almost every community has its own local indicators of the breadth of the nation's economic malaise. San Francisco has decided to open its municipal library on Sundays. Reason: it is being used more heavily than at any tune since the '40s, because it offers a form of free education. Salvation Army officials in Houston observe that the annual influx of drifters migrating from northern cities has begun much earlier than usual this year. The army's 224-bed Harbor Light Center, which normally has vacancies well into the winter, is already filled to capacity.
Meanwhile, Houston Pawnbroker Jimmy Kilpatrick finds that "middle-class people are coming into my shop in droves -- at least triple the number of last year. We've had an influx of wealthier people who have been cleaning out safe-deposit boxes and selling the diamonds and jewelry."
As is usually the case during hard economic times, crime is on the increase.
In Georgia, robbery convictions have risen 25% in the past ten months, and prisons are so crowded that Governor Jimmy Carter has ordered a step-up in an early-release program for old cons to make room for new arrivals.
So Bleak. Anomalies abound, how ever. Transatlantic air travel is off about 15% this year, but seats are hard to find on crowded flights to Hawaii, Mexico and the Caribbean. In Southern California, autoborne tourism is off 8%, and Disneyland is receiving 4% fewer visitors, but affluent Californians have not had their wings clipped. Says Westwood Travel Agent Analee Yorkshire, "They're still bringing kids home from school back East to go to Yucatan or Guatemala for a week. If you have it, you have it." Miami hotelmen speak un happily of a "season of bargain hunters," with fewer big spenders and more church and union groups on package tours, but bookings at ski centers in Colorado and Utah are up as much as 30% this year. The tables and nightclubs along the Strip in Las Vegas are still crowded, but Madam Beverly Harrell complains that some 25% fewer customers have been making their way north to her nearby Cottontail Ranch. "Keep in mind that the bordello is at the bottom of the list," she says philosophically.
"Food and rent come first."
Even people who have not yet been badly hurt by the recession are postponing everythuig from dry cleaning to divorce to save cash for the harder tunes that they see coming. Holiday partying is off sharply. In Boston, Local 34 of the Hotel and Restaurant Employees and Bartenders International Union usually finds banquet jobs for at least 500 members over a Thanksgiving weekend; this year only 90 jobs turned up. Many families are buying fewer Christmas presents, and Diana Tollerson, 27, a newly married Atlanta secretary, is decorating her first Christmas tree as a Mrs. with empty L'eggs panty hose containers and popcorn and cranberry chains. Says she: "It's so bleak that people are going to have to make it an especially gay Christmas some way. So one thing we won't skimp on is the liquor."
Are even harder times coming?
Probably. The recession still has some way to go, and though economists fore see an upturn some tune in 1975, it is difficult to pick its timing and predict how far down the economy will go before it turns back up. Indeed, the course of the recession so far is something of a lesson in the hazards of economic forecasting:
its length and virulence have surprised almost everyone.
Out of Shape. After two years of boom, the economy was due for a let down in 1974. Trying to fight inflation with tight budget and monetary policies, as both the Nixon and Ford administrations have done, always carries some risk of producing a slump. Reason: those policies are designed to reduce demand.
Indeed, there is some question whether it is possible to slow a headlong inflation without producing a recession. Still, when the National Association of Business Economists polled its members in September 1973, 68% saw no recession coming. After the energy crisis began, the conventional wisdom was that the U.S. would suffer something like a mild recession in the first half, followed by a gentle recovery in the second half. As late as September, Otto Eckstein, a member of TIME'S Board of Economists, predicted only a "middling recession."
But the 1974 economy has been wrenched out of its expected shape by a combination of unforeseen events and some policy miscalculations. Even before war broke out in the Middle East 13 months ago, the economy was beginning to slow down, partly because rising food prices were leaving consumers less money to spend on other goods and partly because the Federal Reserve was starting to slow the increase in the nation's money supply. But when the Arab oil embargo began to crimp auto-sales and other energy-related businesses last whiter, the Federal Reserve turned on the money spigot again for a few fateful months. That overreaction, coupled with the end of price controls in April and gigantic oil price hikes, led to an explosion of prices accompanied by a surge in borrowing by companies seeking funds to finance expansion and build up inventories.
As inflation rates reached double digits, the Federal Reserve clamped a stranglehold on the money supply, which choked the housing industry. Government spending remained flat in real terms, offering little boost to the economy. And as prices continued to rise faster than incomes, consumers found that their buying power shrank almost day to day. Strapped and frightened, they began to save more and put off decisions about buying cars, big-ticket appliances and other postponable items.
When the new Administration unpacked its bags last summer, its economists reckoned that the blowouts in housing, auto and retail sales would take place gradually over a period of many months. None foresaw that so much damage would be compressed into the first three months of the Ford presidency. Some economists now believe that the White House changeover itself contributed to the erosion of consumer confidence. Jay Schmiedeskamp, director of the University of Michigan consumer survey, adds that consumers were depressed by blunt talk at the September summit meetings about the nation's troubles and by a feeling that Ford's anti-inflation program was too soft.
Where's Bottom? In any case, the recession has by now picked up enough momentum to drag the economy lower before it turns up again. Right now, economists are watching closely a decline that is just beginning in spending by companies for new plants, machinery and other capital goods. Partly because they had no reason until recently to expect a prolonged slump and partly because they have been anxious to make up for past shortages of steel, aluminum, chemicals and other products, companies have been spending lavishly. The backlog of unfilled orders for capital goods, which stood at a staggering $136 billion in September, is regarded by Administration economists as insurance against a truly devastating collapse in the economy. Yet utilities, airlines, automakers and some other big buyers have begun to trim their spending. If they continue, industrial production will drop that much farther and total employment--until recently higher than ever despite the rising jobless rate--will turn down that much more.
How far down is bottom? Secretary Simon's prediction of a 7% peak unemployment rate is about in the middle of the range of guesses. IBM Vice President David Grove forecasts 6.6% some time late next year; Eckstein foresees 7.4% in the second quarter of 1975, as much as 7.8% later in the year. Unemployment, however, always continues to rise even after production turns up following a recession, because employers do not begin to hire again until several months of rising business convinces them that the pickup is for real. A majority of economists--but a thin one --expect the real G.N.P. to start rising again by the second quarter of next year.
Some glimmerings of trends that could produce an upturn are visible. The Federal Reserve has eased off on its credit squeeze, interest rates are dropping and money is once more beginning to flow back into savings and loan associations. Eventually that should help housing and such allied industries as furniture and appliances--though not for many months, because S and Ls have to repay debts before they can start making new mortgage loans. The strike of 120,000 coal miners, which has badly deepened the recession in the past few weeks, seems on its way to an end; the United Mine Workers Bargaining Council finally accepted a new contract last week and sent it out for a membership vote. Administration economists think that they see signs--more trustworthy than the many false ones of the past--that inflation is at last beginning to abate. Those signs are only beginning to show up in the price indexes, but prices of copper and some other metals have fallen lately and the Council of Economic Advisers is getting some reports of under-the-table deals by manufacturers to sell at a discount goods that they cannot move at high list prices.
Suffer Along. More than by anything else, though, the shape of the recession from here on and the timing of the turn-around will be determined by what happens to inventories--the unsold goods and supplies that businessmen have on hand. Although production is dropping, it will be some time before business can work off those inventories; Chrysler, for example, has a four-month supply of unsold cars on lots and in showrooms. Sometimes the lag involved in pulling inventories into line with sales produces what is known as a V-shaped recession: production plunges until inventories are sold, then shoots up again when new orders are placed. That could occur this time, but it seems more likely that the inventories will be worked off slowly and rebuilt equally slowly and that the turn-around will be barely noticeable when it comes.
Another reason for expecting a slow recovery is that the Administration and the Federal Reserve are determined not to be stampeded into "reflating" the economy by sharp increases in either Government spending or the money supply or through big tax cuts. Though the Federal Reserve has again stoked up the flow of money into the economy, Chairman Burns has not abandoned his long-term goal of holding the increase to a moderate 5% to 6% a year. The Administration, despite hot political criticism, is convinced that it must let the economy suffer along until there are some signs more convincing than those now apparent of a letup in inflation.
Brutal View. That view reflects a conviction that recession is being caused not just by Government action to stop inflation but by inflation itself. Certainly, one reason for the debacles of the housing and auto industries is that the prices of homes and cars have climbed out of the reach of many consumers.
Administration economists worry that the national economic debate is being put into terms that are too simplistic: "Are you fighting inflation harder than recession?" In their opinion, healthy growth cannot be resumed until the U.S. can dig out the inflationary expectations that have seeped into almost every cranny of the economy.
Prices will continue to rise less and less controllably as long as businessmen, union leaders and consumers take it for granted that they can always count on the Government to intervene to prop up jobs, incomes and profit. Reflation now, they say, might produce a momentary upturn, but it would only lead to another round of price rises, another consumer panic, another slowdown in business investment--and a more devastating bust. They worry that the U.S.
cannot follow that cycle long without reaching the sad state of the British economy. Inflation is so ingrained in Britain by now that any attempt by the government to stimulate economic activity results not in a rise in real output but only in higher prices.
Ford and his advisers recognize, however, that they have a brutal problem: if the recession continues longer than now expected, they must choose the point at which the terrible costs of a continued downward spiral outweigh the benefits of tempering inflation and dictate some new stimulation (probably tax relief rather than more spending). But that point, in their view, has not come yet, and for a while longer, recession will continue to alter the lives and outlooks of millions of Americans.
* The term has no precise definition but can generally be taken to mean a substantial decline in business activity accompanied by a significant rise in unemployment and lasting several months.
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