Interest rates tumble, but the recession subbornly lingers on
Despite the late-summer explosion in the stock market, American business is in a somber and cautious mood as it approaches Labor Day.
Then factory hands and clerks stream back from the beaches and backyards to their lathes and typewriters, and salesmen hit the road again, knowing that their customers will once more be at their desks rather than on the golf links or tennis courts. Everyone, from the executive suite (indeed, the Oval Office) to the grocery checkout, tries to read the early signs to divine what is likely to occur in the months ahead. The chief questions: When is the economic recovery coming, and how strong will it be?
Rarely has the search for omens been as anxious as now, when business is still mired in a slump that has driven unemployment to the highest point in 41 years and bankruptcies to the worst level in half a century. And rarely, if ever, have the signs been so confusing. The forecasters who try to figure out the prospects for jobs, prices, production and incomes are in the position of a motorist approaching a schizoid traffic light that is flashing green, amber and red signals all at once.
Which signal turns out to be the true one will pose a crucial test for Reaganomics, the theory espoused by President Reagan that a combination of deep cuts in taxes and federal spending, tight control of the money supply and a general lessening of Government intervention in the economy will eventually lead to healthy, noninflationary economic growth. By last summer, the President had put most of his program through Congress, and just about then the slump started. But the policy has yet to achieve the promised payoff.
Fortunately, for almost the first time since the beginning of the recession in July 1981, there are some genuinely hopeful signs. The towering interest rates that virtually every economist has identified as the most daunting hurdle to recovery have come tumbling down faster than al most anyone would have dared to predict a few weeks ago. The Federal Reserve Board last week dropped its discount rate, the amount it charges banks and other financial institutions that borrow funds, for the fourth time since July 19. The discount rate now stands at 10%. Mean while, the prime rate that banks charge their most creditworthy business customers has dropped to 13½%, down three points since midsummer and the lowest since September 1980; some other short-term rates have come down even more sharply. The decline is also spreading to interest charges that are of concern to anyone hoping to buy a house or car. Government agencies last week lowered the interest charges on VA-or FHA-backed mortgages to 14%, and the financing subsidiary of Ford Motor Co. dropped the level of new car-purchase loans to an average of about 16%; all are down one point.
Of more concern to Main Street, the annual rate of inflation, as measured by the Consumer Price Index, dropped in July to 7.3%, after two months of renewed flirtation with double digits. For a welcome change, after-tax incomes are now rising faster than prices, about 1½% more rapidly in the most recent twelve months. That means that consumers are slowly acquiring more purchasing power, following two years of stagnation or even decline.