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Economy: More Sunny Skies or Cloudy Horizon? : Contradictions Make It Hard to Get Clear Picture

July 13, 1986|JONATHAN PETERSON and BILL SING | Times Staff Writers

John and Carolyn Colwell are primed to start their own consumer spending spree during the next year. The couple, both sound editors in the film industry, just bought a new house in Granada Hills twice the size of their previous home. Their next step will be to fill it up with furniture.

But despite having to pay twice as much on mortgage payments and facing higher utility bills, the Colwells are confident about their financial well-being and plan to complete their home decorating project within a year.

"We feel very optimistic about the future, or else we wouldn't have bought the home," said John, 37.

A somewhat different attitude prevails these days among employees at Cross & Trecker Corp. A leading producer of machine tools, the Bloomfield Hills, Mich., company recently announced that it would lose money for the second straight quarter. Managers are now wielding their budget knives in a $12-million annual cost-cutting effort that, among other things, will pare the payroll by 300 jobs.

"There is no way of knowing when we will see some improvements in the market," said Richard Priebe, director of public affairs at Cross & Trecker. "It could be sometime soon. It could take a number of months. That's a question nobody can answer."

As these contrasting examples suggest, the U.S. economy today shows signs of both health and disease, much to the bewilderment of corporate executives, government officials and investors.

The current combination of low inflation, low energy prices and improved interest rates seems the perfect prescription for economic growth to many. Indeed, the confluence of favorable forces is one Americans have awaited for years. And consumers, such as the Colwells, have displayed their confidence with robust purchasing of homes and automobiles.

Yet contradictory signs abound. Many of the nation's factories are creaking along far below maximum operating levels, despite a falling dollar that was supposed to help U.S. manufacturers compete with foreign producers. Corporate profits are disappointing. After a boom earlier in the recovery, business capital investment has been meager.

Bank failures are continuing with record-breaking frequency amid a virtual depression in the oil patch and the Farm Belt. The United States in May imported more farm products than it exported, the first such agricultural trade deficit in at least two decades. A startling decline in the value of certain commodities--and the real estate on which they are produced--has caused widespread financial pain.

The paradox has left many wondering whether the U.S. economy is merely pausing for a breather during its fourth year of expansion or whether harder times are on the horizon. Optimists point to several signs. The Federal Reserve Board's decision Thursday to reduce its discount rate for member banks will provide at least some push, as banks lower some rates in tandem. Most mainstream economists also expect consumers to continue buying at a healthy pace, manufacturing output to pick up and sales of U.S. manufactured goods to improve as well.

Expect Higher Growth

In light of such favorable forces, many economists anticipate a respectable growth rate of 3.5% to 3.8% for the remainder of 1986, according to a survey conducted by Blue Chip Economic Indicators, a Sedona, Ariz., newsletter. Such a performance would be a clear improvement over the sluggish 2.9% rate for the first quarter although significantly worse than the 4.5% growth rate predicted by those same economists in May.

But the truth is that the conflicting personalities within today's economy confound the experts, and nobody can say with assurance what's going to happen.

"In the past, when you had big drops in price levels and interest rates, you had a boom," noted Richard Rahn, chief economist and vice president of the U.S. Chamber of Commerce after some disappointing economic news recently. "Why didn't it happen this time?"

The outlook is complicated further by uncertainty surrounding the tax code, with some anticipated changes already dampening investment. In addition, the possibility of further budget cuts could make the economy worse before it gets better, economists say.

On one point, however, there is broad agreement: Further economic expansion will require help--from debt-saddled consumers who must continue with major purchases and from factories that must crank out a lot more goods.

Consumer Is Key

American consumers have carried more than their share of the load throughout the recovery that began in the fourth quarter of 1982. In fact, consumer spending has accounted for as much as 85% of the gross national product for the last two years, according to A. Gary Shilling, a New York economic consultant. "If he (the consumer) throws in the towel, we've had it," Shilling declared.

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