A Lusty, Lopsided Recovery

Executives and economists fear that huge deficits will slow growth

Federal Reserve Chairman Paul Volcker calls the U.S. economic recovery, which reached its first birthday this month, "a lusty infant." Ronald Reagan proudly notes that output is "growing faster than even we expected." The rebound has rescued some 2 million Americans from unemployment and given millions more a new feeling of confidence. Families are buying more shirts and sofas, carpets and computers, autos and airline tickets now than they were in the bleak autumn of 1982. Factories are bustling again as companies hurriedly build up inventories to make sure they stay ahead of demand. The Federal Reserve Board reported last week that industrial production hit an all-time peak in October, up 14.8% from the recession's 1982 low point.

As sales have surged, so have profits. A Wall Street Journal survey of 506 major companies found that earnings were up 29% in the July-September quarter, compared with the same period a year ago. Some of the most dramatic improvements came in several industries hit hard by the recession. Profits jumped 44% in the forest-products business, 58% for rubber companies and 93% for airlines. The auto industry had the most stunning turnaround of all. After losing $187 million in 1982's third quarter, General Motors, Ford and Chrysler earned $1.2 billion in that period of 1983.

In the past, such rosy figures would have been cause for unbounded optimism. But not this year. Many economists and businessmen remain unusually subdued and concerned. Reason: the recovery is endangered by the federal budget deficit, which threatens to top $200 billion in each of the next few years. The deficit has been largely responsible for keeping real, or inflationadjusted, interest rates at unprecedented heights. The difference between the prime rate that banks charge corporate customers (currently 11%) and the inflation level is now about 6 percentage points, or roughly twice as large as in previous recoveries.

As the economy gathers strength, the credit needs of private business could collide with the Government's heavy borrowing and push interest rates higher. Some economists fear that a serious slowdown in growth, or even a new recession, could come in 1985. Warns Henry Kaufman, widely respected chief economist for Salomon Brothers, the Wall Street investment firm: "The durability of this economic expansion is going to be significantly limited by the huge deficits in the federal budget." Industry leaders share that anxiety. Says John Smale, president of Procter & Gamble: "The size of the federal deficit is a national problem of substantial urgency that must be addressed with statesmanship, vigor and speed."

Despite the growing alarm, Congress rushed to adjourn last week without facing up to the budget dilemma. The consequences of such inaction could be severe. Even if the infant recovery survives, it may grow up deformed, with some parts of the economy performing far worse than others. Onerous interest rates could stall comebacks by the housing and auto industries. The high cost of borrowing money could depress capital spending and thus continue to devastate key business sectors such as steel, construction equipment and machine tools, which have barely begun to climb out of a deep slump.