Is this really a recession or another case of New York media hype?
The question is smart-aleck but appropriate because the economic news is indecisive. There are signs of serious weakness, but also evidence of surprising strength. A lot depends on where you live.
It feels bad on Wall Street, where thousands of brokerage house employees have been let go with the end of the 1980s financial services boom. And that has had a ripple effect in New York and the Northeast, where real estate prices are falling, banks are hurting and retail sales are weak.
But the effect is magnified because media attentions make New York's joys and sorrows seem more important than those of other places. It was that way in the 1980s, when severe economic suffering hit farming and manufacturing in the Middle West and the oil and gas industry in the Southwest. People lost jobs, lives were rearranged.
Yet farmers and factory workers were not the symbols of the decade. That's too bad because they might have sent a cautionary message--farmers on the dangers of leverage in farmland and factory workers on the hard realities of world competition.
Instead, their struggles were pigeon-holed with words such as Rustbelt and Oil Patch. The symbol of the decade was the yuppie investment banker, making millions on inflated expectations and borrowed money in the "bull market" on Wall Street.
Well, the bull market is over, the investment bankers are out of work, and so a wail has gone up about a nationwide recession.
But recession is not evident nationwide. In fact, places that struggled in the '80s feel a lot better today. Farming is healthier, manufacturing has modernized. In cities such as Cleveland and Milwaukee, where industry has diversified, retail sales are surprisingly strong. In Houston, employment is growing and real estate is climbing back from depression.
Job loss statistics reflect the geographic differences. "Workplace Trends," a Cleveland-based newsletter, says 41% of corporate staff cuts this year have occurred in the Northeast-New York area. Elsewhere, job losses are scattered: 12% around Detroit, 6% for the Chicago area and 12% for the whole West Coast, from Seattle to San Diego.
Layoffs in Southern California's defense industry are not included in those figures, but even here joblessness has not mounted in other industries.
To be sure, the economy is growing very slowly--and may be slipping into recession, as the latest national unemployment figures and the Federal Reserve Board suggested last week. And, of course, the Persian Gulf crisis is a wild card. But fears that are sometimes heard today of economic collapse and worldwide depression are overblown.
Why are such fears heard at all? Because people who have never lost their jobs feel that they are in danger of losing them now. "Whatever you call it, this won't be a typical recession," says Adrian Dillon, chief economist for Eaton Corp., a manufacturer of auto parts and electrical equipment.
This time, in addition to moderate factory layoffs, cutbacks are coming in services. Banks and insurance companies, advertising agencies and accounting firms, retail stores and airlines are all cutting employees. And that's not to mention other firms in real estate and construction, business consulting and the hotel industry.
That's unusual. In normal recessions, apart from workers idled by construction cutbacks, service employees sail through the bad times with little discomfort. But this is shaping up to be a "services recession," says Charles Clough, chief investment strategist for Merrill Lynch. "We'll find we don't need as many lawyers, real estate brokers, advertising copywriters--or investment strategists."
That's not a pleasant thought, because more than 75% of the 117 million people in the labor force work in services. Job losses therefore could be widely spread and lingering--meaning the downturn might be long and annoying, like a persistent backache.
Still, services are being hit with cutbacks for good, economic reasons--they haven't been as productive as they should be. While U.S. manufacturing in the last decade has made historic gains of 4% a year in output per labor hour, a lag in services has reduced overall U.S. productivity gains to near zero. The society is poorer because of inefficiency in services.
Consider just a few examples from the '80s. Costs of medical services went up dramatically, but the economic payoff in better health--as measured by longevity and infant mortality rates--wasn't there. Other countries get better health care for less expenditure.
Another example is 24-hour supermarkets. Stores stayed open longer, adding staff, keeping checkout stands working, but didn't sell a proportionately greater amount of groceries. So overall store productivity fell--although such inefficient use of resources may have convenienced customers.
Finally, deals made at inflated values with government-insured savings and loan deposits have yielded thousands of less-than-productive hotels, motels and retail stores.
Now the reckoning has come. The '90s will see the non-productive fat wrung from services--as the last 10 years saw the restructuring of manufacturing and oil drilling. Banks and other financial service businesses are already shrinking.
The result is that productivity will rise, and the economy's tendency toward inflation will come down. This means interest rates will fall and the economy will resume its growth--within a year, say experts.
To repeat the question: Is this really a recession? Perhaps a better description would be a therapeutic purge for a basically sound and always changing economy.