Business: Recession: Deeper and Longer

TIME'S economists see scant price relief, more unemployed

It will be longer and deeper than even the pessimists were predicting only a short time ago.

That is how TIME's Board of Economists views the Recession of '79, which it forecast as early as last November and which began in April. The bipartisan board agrees that the worst is yet to come: the recession will last 12 to 15 months rather than six to nine months, as previously forecast. The economy will shrink 3% during the decline rather than just 1% to 2%. Meanwhile, inflation will remain near 10%. Not until next summer will expansion resume, and even then it will be rather weak. Scarce and expensive energy will mean that growth throughout the 1980s will be sluggish. Says Democrat Walter Heller, who was President John Kennedy's chief economic adviser and now counsels brother Teddy: "The bad news bear is up the path. The recession has only just begun to bite."

Just now, that beast seems rather distant. In fact, the economy was somewhat stronger in August and September than it was in the early summer. With gasoline readily available again, buyers have returned to shopping centers and auto showrooms. Reflecting this consumer boomlet, the Commerce Department guesstimates that the economy may have actually grown at an annual rate of 1% in the third quarter. But in the fourth quarter, which begins this week, the brief spending splurge is expected to fade, and the pace of business will slow sharply.

Republican Alan Greenspan, perhaps the most optimistic member of TIME's board, sees a roller-coaster recession: the economy, after its slight rise, will plunge steeply during the coming winter and spring. Unemployment, which has hovered at about 5.7% for the past year, inched up to 6.0% in August, and a majority of TIME'S board predict that it will reach 8% by next summer, meaning some 8 million Americans will be out of work. That is severe, of course, but not as bad as during the 1974-75 recession, when the jobless rate hit 9%.

As an antidote, several board members favor a tax cut. Heller argues that an early $28 billion reduction for consumers and corporations is "the only way to fly." Joseph Pechman, head of economic studies at the Brookings Institution, agrees on the need for a prompt cut.

The length and depth of this slump will be largely determined by monetary policy. In the eight weeks since Paul Volcker took over as Federal Reserve chairman, businessmen's basic cost of borrowing money has jumped from 11.75% to 13.5%, the highest in history. Most board members hold that the increases will soon stop but interest rates will remain steep over the next year. Some fear that the Fed may worsen the recession by inducing a classic credit crunch, in which little money is available for borrowing to finance new plants and create jobs.

So far even the populist Carter Administration has backed Volcker's high-interest policy. Yet banks have had plenty of money to lend anyway—perhaps too much. In the past month, the money supply has grown at an annual rate of 11.5%. Beryl Sprinkel, executive vice president of Chicago's Harris Bank, argues that this "hemorrhaging" must be stanched if inflation is ever to be curbed.