Business: The Hesitant Recession

TIME'S economists see a milder downturn and still higher prices

An economy that stubbornly refuses to cool off, consumers who will not stop spending, prices that keep on rising and, looming on the horizon, the biggest new inflationary jolt of defense spending since the Viet Nam War.

That was the gloomy backdrop last week as TIME's Board of Economists gathered in New York City for a look at how the economy is shaping up in light of Jimmy Carter's proposed new budget for fiscal year 1981. The view ahead was hardly encouraging. At almost every turn, the economists found the budget bloated with new spending, much of it camouflaged by various forms of financial and fiscal prestidigitation. They saw the economy itself remaining dangerously inflated, yet in a fundamental sense growing weaker and less productive as the year progresses. Summed up Board Member Beryl Sprinkel: "The budget is far more expansionary than is consistent with anti-inflation policy."

As if to underscore the inflation danger, January wholesale prices released last week showed a jump of 1.6%, or a compound annual rate of 21%, the largest such wholesale price rise in five years.

In a perverse way, one of the most discouraging projections of all was the board's consensus forecast that a recession for 1980 now looks to be a somewhat milder affair than the 2.4% overall slump that had been predicted as recently as last December. Recession is certainly painful for anyone thrown out of work, but without at least a temporary economic downturn there is no real hope of slowing the price spiral.

At its December meeting, the board anticipated that last autumn's rise in interest rates and the resulting tightening of credit would lead to a sharp 4% annualized drop in economic activity during the first half of 1980, as consumers cut back on spending, businessmen laid off workers, and the economy itself began to slow. This was to be followed by a modest autumn rebound, and a return to real growth by year's end.

But rising interest costs, which the Federal Reserve pushed up again last week by raising the rate it charges member banks to 13%, have not slowed consumer spending. Moreover, mild winter weather has made it easier to go shopping and eased the strain on home heating budgets. This has helped to fatten consumer pocketbooks, enabling people to keep on spending though wages have not kept pace with inflation.

Yet the strength of sales was puzzling to the board. Guest Member Gary Wenglowski, of the Wall Street investment firm Goldman Sachs, explained the willingness of consumers to spend and spend by arguing that inflation has so bloated the value of residential housing that anyone with a home of his own has now come to look on it as a sort of savings account that one can live in. The result, he said, is that people have been increasingly willing to dip into their nest eggs or go into debt to support their living standards. Joseph Pechman of Washington's Brookings Institution, on the other hand, suggested that much of the shopping splurge has been attributable to a consumer compulsion to buy now before prices shoot into orbit. Yet Brookings Economist Arthur Okun noted that considerable spending has been for goods like furniture and clothing, which have been rising in price far more slowly than other consumer items.