A Lusty, Lopsided Recovery

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Martin Feldstein, the President's chief economic adviser, fears a "lopsided recovery that would be slower paced and more fragile than a balanced recovery." Other Administration officials, however, have repeatedly brushed aside Feldstein's concerns. Says Treasury Secretary Donald Regan: "I wish economists would sit back and relax. [This will be] one of the greatest recoveries in history."

That may depend upon the actions of the Federal Reserve's Open Market Committee, which met last week to set guidelines for the Government's monetary policy. So far this year, the Fed has tried to follow a narrow course that would promote the recovery and yet prevent a new burst of inflation. After the U.S. money supply grew at an alarming 12% annual rate in the spring, the Reserve Board tightened its policy. By October, the pace of money growth slowed to less than 2%, and the Fed's tough stance kept short-term interest rates at a steep 8.5% to 11% level.

The decisions made at last week's Open Market Committee meeting will not be made public for a month. But a summary just released of the Federal Reserve's October session reveals that the committee agreed on a "slightly lesser degree of restraint." Wall Street experts doubt, however, that the Fed will push down interest rates substantially. Says Stephen Roach, senior economist at the Morgan Stanley investment firm: "My feeling is that the Fed will maintain a wait-and-see attitude through the rest of the year."

The Reserve Board's cautious policy las kept mortgage rates hovering around 13.5% and stalled the housing recovery. The Commerce Department reported last week that housing starts dipped 3.8% in October, after a 12.2% decline in September. The National Association of Home Builders expects starts to total 1.7 million units this year, a 58% increase over 1982, but it predicts no further growth in 1984. That would be a poor recovery by past standards. After the 1973-75 recession, housing starts rose for three years and peaked at more than 2 million.

A flat housing market would eventually crimp sales of building materials and home furnishings, from timber to toilets. The lumber industry is still shaking off the recession and is hardly prepared for a new shock. In the Northwest, the number of sawmills has declined by about 13% since 1979, and their work force has dropped by 20%, to 96,000. Says H.A. Roberts, executive vice president of the Western Wood Products Association: "We're more efficient these days, and sales volume is relatively good. But we're not nearly as healthy as in 1979."

The auto industry's resurgence is also vulnerable. Sales of U.S.-built cars in the first ten days of November were up 5.6% from a year ago. That increase, however, was less than the 18% gain recorded during the first ten months of 1983. The industry is still selling cars at a pace 35% below the peak rate in 1978. If interest rates begin to creep up, customers could start shunning the showrooms once again.