Where Is That Recession?

The slump has slipped, but it is still on the way

The Carter Administration's effort to ease the nation into a short and shallow business downturn in order to slow inflation increasingly resembles the attempts in 1916 by Russian noblemen to kill Rasputin: they fed Tsarina Alexandra's mystic poisoned teacakes and wine, then shot him three times, and finally had to drown him in St. Petersburg's icy Neva River. Despite record-high interest rates, the long awaited recession still refuses to materialize definitively.

Last week the Commerce Department reported that the nation's output of goods and services, which had declined at an annual rate of 2.3% in the second quarter, actually rose again by 2.4% in the July-September period. Since a recession is commonly defined as two consecutive quarters of economic decline, it thus will be early 1980 before experts can formally announce the arrival of a textbook recession. But the latest indications of growth were deceiving and cannot endure long. The upswing was due primarily to a temporary increase in consumer spending, as people who had been kept away from stores last spring by gasoline shortages did catch-up shopping during the summer.

Economists believe that the nation's business will decline again this fall. Nonetheless, signs of continued economic vigor abound. Homebuilding, which is usually hit hard by high interest rates, remains strong; housing starts actually rose by 4.2% in September, to an annual rate of 1.9 million. At the same time, the use of the nation's industrial capacity edged up above 85%.

It was just such evidence of economic strength that two weeks ago led Federal Reserve Chairman Paul Volcker to push up interest rates to new highs and announce new measures to curb the inflationary growth of the nation's money sup ply. But the money stock actually expanded by $2.8 billion in the first week after the "Volcker Package" was announced, and the Fed immediately began tightening credit and forcing up interest rates still further. This drove the Dow Jones index of industrial stocks down an extra 24 points last week, renewing memories of the Great Crash that occurred 50 years ago this month (see following story).

Already the cost of money for almost all purposes is soaring. Federal Home Loan Bank Board Chairman Jay Janis predicts that mortgage rates, which now average 11.5% nationwide, could reach 14% by January. Meanwhile, the ability of consumers to pay for costlier credit, oil and everything else is rapidly declining. Washington Economic Consultant Michael Evans calculates that inflation and the rising tax bite have reduced the spendable income of a family of four earning $20,000 annually by $1,000 so far this year. If consumers suddenly begin closing up their wallets and pocketbooks, as they are expected to, inventories of unsold goods will rise and business will fall off sharply. Even Treasury Secretary G. William Miller, who had previously been happy-talking the economy by predicting that the recession was already half over, last week admitted that the coming downturn might be deeper than he had thought and warned that "strains and dislocation are still ahead."

After the upheavals caused by Volcker's monetary policy moves, the international commodity and money markets last week were enjoying rare refreshing quiet; the dollar held its own in Europe and rose dramatically against the yen in Japan. At the same time, gold slipped moderately to end the week at $393 per oz.

Fed Chairman Volcker remains a man on the spot. Lane Kirkland, George Meany's apparent successor as president of the AFL-CIO, has already condemned the Fed's big rate boost as the "wrong move at the wrong time." Economist John Kenneth Galbraith labeled the Federal Reserve's program "an incredibly dubious policy" that will cause a steeper decline but help very little in slowing inflation.

Carter Administration officials are remarkably untalkative about the record rates, evidently in hopes that the developing downturn will become known as the Volcker Recession rather than as a product of Jimmynomics. Indeed, voters do seem concerned about the climbing cost of money. One night last week, when Volcker arrived at Washington's Kennedy Center for a preview showing of Tom Stoppard's play Night and Day, a woman approached him and said plaintively, "Please, don't let interest rates stay high for too long." Replied the Federal Reserve chairman, as he removed the cellophane from his 20-c- Antonio y Cleopatra Grenadier cigar: "We're trying our best."

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