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Nonetheless, the doings on Wall Street have converted some of the gloomiest economists to at least mild optimism. Morgan Guaranty Trust only a few weeks ago had predicted that "the worst is yet to come." Milton Hudson, the bank's chief domestic economist, now says, "Because of this incredible decline in interest rates, I am suddenly feeling very upbeat." Edward Yardeni, chief economist of E.F. Hutton & Co., startled his colleagues early this year by forecasting a 30% chance that the recession would spiral down into an outright depression. He asserts today that "the recovery mechanism is slowly getting into gear."
It looks, in fact, as if the "invisible hand" of Adam Smith's self-regulating economy may be very belatedly and imperfectly back at work. Though it was the persistence and severity of the recession that brought interest rates down, the drop will now help push business back up. Irwin Kellner, senior vice president of Manufacturers Hanover Trust, the fourth biggest U.S. bank, estimates, for example, that "every drop of 1 percentage point in the mortgage rate adds another 10% to the number of families that can afford to buy a house." Lower rates also should encourage a slow revival of other credit purchases, and help debt-burdened businesses stay out of bankruptcy by reducing the interest payments that are now devouring their profits.
Though they readily admit that the recession has dragged on longer than expected and has probably not ended even yet, nearly all economists expect an upturn of sorts to begin soon. Sam Nakagama of Kidder, Peabody & Co., a New York City brokerage firm, denounces his colleagues and the press for even talking about a recovery when there are no conclusive signs of one. Yet he adds in the next breath that he too expects one to start by year's end.
A major cause for the anticipation of an upturn, apart from the drop in interest rates, is that most consumers have come through the recession in fairly good shape. They have pared down their debts from a high of 14.9% of disposable personal income in May 1979 to a bit less than 13% last June. Personal income, after taxes, rose 2.1% in July, spurred partly by the second stage of the Reagan Administration's tax cuts. Since the gains are no longer being eaten up by inflation, people have the money to buy things if the drop in interest rates, a stock-market surge or any other good omens motivate them to open their wallets.
Wealthier consumers have profited by parking their money in high-yielding interest-bearing securities, and some lines of high-priced goods and services have weathered the recession well. For instance, crowds still line up outside to see Broadway shows, where tickets can cost $40 a seat.