Masonry Magazine July 1975 Page. 21
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The Recovery May Not Be So Modest, After All
That's the view now of quite a few economists in government and industry. They question those forecasts of an only sluggish upturn. This is still not the dominant view among analysts; the majority continues to believe the expansion will be moderate. But many of the latest business statistics seem to hint at more strength. So the more optimistic scenario should not be ignored.
Virtually all forecasters agree on this much: The recession is definitely over. The long-awaited business recovery is now clearly under way. The consumer is apparently coming through, spending his tax rebate check. Retail sales posted big gains in May. Even auto sales have shown improvement.
What's more, inventories have continued to run off rapidly. This year's decline is the biggest in history, much sharper than economists had forecast. Manufacturers' orders have started to turn up. New orders for durable goods rose again in May, following April's zippy 6.4% advance a good sign.
But how strong will the upturn be during this year's second half? The two scenarios that dominate current thinking have different implications for interest rates and for profits.
The Gradual-Recovery School
The gradual-recovery school doesn't see where the thrust for a really strong 1976 will come from, once the initial impact of the big tax rebates has run its course. They are especially worried about the weakness in autos and home-building, the sectors that have led the nation out of most of the postwar recessions. And the upturn wouldn't cut very deep or rapidly into unemployment, though it would let the fires of inflation burn still lower.
This school expects total output of goods and services -the so-called Gross National Product to be rising at an annual rate of 4-5% in the last half. This is in real or physical terms, after adjusting out price increases. Real GNP in the first year of most postwar upturns has risen 7-8% a year.
The Growing Minority Sees a Livelier Upswing
The growing minority sees a livelier upswing, more like the standard pattern. One version of the more optimistic scenario comes from Chairman Greenspan of the President's Council of Economic Advisers. For the third quarter, he projects a modest rise in real GNP-probably in the 3-4% range. By the fourth quarter, though, he sees output rising at a 7% annual rate.
This forecast assumes a continued strengthening in consumer buying, as heightened consumer confidence reinforces the impact of the tax rebates. Even car sales may show some marked improvement, this analysis goes, because, most of the auto slump can be linked to past slippage in purchasing power-a decline which started several years ago, but which is now being reversed.
Stepped-up consumption would catch many firms with gaps on their shelves, forcing new ordering and a brisker upturn in both production and hiring. There would be a sharp turnabout-first, from inventory liquidation to holding stocks steady, then shifting to accumulation. New housing starts could yet strengthen more rapidly than the majority thinks.
Quite a few economists now expect more housing starts by year-end. New units begun rose by 14% in May over April the second month in a row. Permits granted.. a good indicator of activity in the future were up 9%; and the May rise followed a 24% increase in April, as compared with March.
To be sure, home-building still has its problems. Lenders are cautious, after last year's big losses from construction and mortgage loans to over-speculating builders. And many builders are out of business. Also, high prices are a drag. But new starts may reach a 1.5 to 1.6 million annual rate by December, up from the 1.3 to 1.4 million widely expected now.
The Greenspan outlook is a little too optimistic for many economists. They simply do not see a significant pick-up in auto sales; high car prices and the talk of gasoline at 70 cents a gallon will have a depressing impact. And home-building may not show the kind of speed-up expected by Greenspan-not with those high prices, high mortgage rates, and caution of builders.
But the Council Chairman is a talented business-cycle forecaster. And some of his views are shared by Federal Reserve Chairman Arthur Burns, plus some liberal economists who served in past Democratic administrations. It is worth noting that the experts have underestimated the strength of most of the postwar recoveries. After an economic upturn gets solidly under way, its momentum alone can carry it further than mathematical projections show.
The more hopeful scenario has now become a respectable point of view although it is on the high side of the projection range. To be sure, it may not be considered the likeliest possibility by many of the analysts. But it is rated as a one-in-three probability. So it cannot be dismissed lightly.