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Struggling Recovery Fuels Fears of a 2nd Slump

August 11, 1991|JONATHAN PETERSON | TIMES STAFF WRITER

As the economy's vital signs display lingering frailty, analysts and policy-makers are pondering the unhappy question: Is the nation going to sink back into a slump?

"This is a recovery that's trying to become entrenched, but so far it's still in the struggling stage," said Robert G. Dederick, chief economist at the Northern Trust Co. in Chicago.

The feared scenario is known as a "double dip," in which recession gives way to a fleeting moment of economic growth, only to revert back to a slump. For now, most experts say that such a situation will be avoided. In a survey released Friday, nine out of 10 forecasters said the economy would avoid a second plunge and grow slightly in the coming months.

However, recent economic reports have underscored the fragile nature of the national recovery, fueling fears of the double dip.

"Perhaps it's a bigger possibility than a lot of us thought when the recovery began," said Dederick, who forecasts a subdued upturn.

Part of the talk about a two-part recession arises from the economy's current performance, part from the pattern of past upturns.

A national recovery appears to have kicked in during the spring, ending the 1990-91 slump a few months shy of its first birthday, according to preliminary data from the Commerce Department. Signs of economic life have included a drop in new claims for unemployment insurance and gains in housing and industrial production. The government's index of leading economic indicators has risen five months in a row.

In recent days, however, statistics about the labor market, retail sales and wholesale prices all seem to be signaling a sputtering economy. Such stores as Sears, Roebuck & Co., J.C. Penney and Woolworth reported that July sales were down from a year ago.

The Federal Reserve Board, reflecting high-level concerns about the recovery's vitality, moved last week to push down interest rates.

"The consumer is curled up in front of his TV set--not shopping at the malls," said Robert A. Brusca, chief economist at Nikko Securities in New York, who compares current economic conditions to the deceptively benign eye of a hurricane.

Double-dip anxieties are also fueled by history: Several recessions in recent decades displayed the pattern of a decline, interrupted by a few months of economic growth, then another downhill slide. (A recession is loosely defined as two consecutive quarters of decline in the gross national product.)

For instance, the downturn that began in late 1981 suddenly gave way to positive growth in the spring before the economy went back into a tailspin that lasted until late in the year. Some even say that the entire 1981-82 recession was the second dip in a downturn that began with a brief, intense slump in 1980.

"If it happens, this will not be a new phenomenon," said Norman Robertson, chief economist at Mellon Bank in Pittsburgh, Pa.

Nevertheless, there are huge differences between today's circumstances and those in previous recoveries--differences that make a second tumble into recession less likely, in the view of most analysts.

In 1980, a time when inflation remained a top national concern, Federal Reserve policy to raise interest rates may have set the stage for the 1981-82 tumble, many argue. These days, by contrast, the Fed is favoring lower interest rates.

On other occasions, misjudgments in handling inventories have given downturns the jarring quality of a roller-coaster ride.

The error goes like this: Companies order too many goods early in the recession. At first, those orders spark some economic growth, as factories keep humming. But then, as products piled up unsold in retail stores, auto dealerships and warehouses, production is slashed--throwing the economy back into recession.

This may help explain why a slump gave way to modest economic growth for a few months in early 1974, before the economy plunged downhill for almost a year, economists say.

These days, errors of the past appear unlikely. Companies have kept their inventories lean. Indeed, Friday's report that producer prices fell 0.2% in July suggests that inflation is moderating, making it easier for the Fed to reduce interest rates in the coming weeks.

"I don't believe there's going to be a double-dip recession," said Bruce Steinberg, an economist at the Merrill Lynch investment firm in New York. "I think the economy has begun a recovery--not a strong one by standards of the past--but still the real thing."

Instead of inflation or inventory bottlenecks, the economy currently has a different set of hobgoblins, analysts say.

Corporate cost-cutting efforts place a shadow over employment growth at a time when many Americans have had their hours cut back or lost their jobs. Worried bankers remain wary of offering credit, inhibiting business activity. U.S. exports, which have been an economic strongpoint, may slow down because national economies are weakening overseas.

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