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Economic slowdown arrives: an Arkansas economist listens in on an international conference of 500 world leaders in Washington, D.C.

Economic Slowdown Arrives

An Arkansas Economist Listens In On An International Conference of 500 World Leaders In Washington, D.C.

"Slowdown," "Recession," "Stagflation," "Oil Crisis," "Defense Cut," and "An Increasingly Complex Economy."

These themes dominated the Washington, D.C., meeting last week of the high-powered National Association of Business Economists (NABE).

About 500 corporate, government, and academic economists were addressed by high ranking government officials, including: Federal Reserve Chairman Alan Greenspan, Secretary of Defense Dick Cheney, and Chairman of the Council of Economic Advisers Mike Boskin.

Attention was riveted on Chairman Greenspan during his noon speech, arguably the most powerful economic policymaker in the United States, or perhaps the world. Greenspan studiously sought, as usual, to avoid saying anything earth shattering (and thus disappointed one journalist overheard in the hall complaining to colleagues, "He didn't say ANYTHING!").

"The economy is exceedingly complex...a moving target. We face difficulties in determining where we are...during critical economic episodes," Greenspan said.

What Greenspan didn't address were the central questions facing the economy: "Are we in or going into a recession? What is the Fed going to do?"

But, Robert Black, president of the Federal Reserve Bank of Richmond, underscored what many economists fear is a Fed commitment to whipping inflation, even if the consequence is a recession.

"I strongly support zero inflation...mandating the Fed eliminate inflation in five years," Black said.

If Black's comments are a guide to Fed sentiments, Arkansas, along with the national economy, is in for a rough ride in coming months.

Challenging Times

Agreement was unanimous among high government officials and corporate economists: The country is in a slowdown.

The only disagreement was over when the economy would slip into recession (usually defined as two or more consecutive quarters of GNP decline).

Fifty percent of the members of the NABE surveyed predicted a recession in the next 12 months; with the rest expecting a recession in the next three months. In the halls and presentation rooms pessimism about a recession was high.

Another recurring theme was inflation -- partly resulting from the increase in oil and gasoline prices due to developments in the Middle East.

At this point oil inflation is just filtering through the economy -- in fuel and fare increases for airlines, Little Rock taxis and Arkansas-based trucking firms, etc. However, previously existing inflation is more disturbing.

The Fed has sent an unmistakable signal -- reduce the deficit or monetary policy won't ease. (Monetary policy has been tight, in short-term interest rates and in growth of the money supply; M2 has been flat in real terms.) Thus the Fed holds hostage the fiscal policy of the United States, as well as setting monetary policy.

The Bush administration has been mildly critical of tight Fed policy.

"The administration has thrown, not rocks, but gravel," said Charles Schultz, former chairman of the Council of Economic Advisers.

Mike Boskin, chairman of the Economic Advisers and President George Bush's top economic adviser, said, "Prior to the oil shocks, there was existing sluggish growth. Some regions and sectors have already weakened; it is no coincidence that those sectors hardest hit are responsive to interest rates and tight credit."

Reading between the lines of administration and congressional spokesmen at the NABE conference: Nobody wants a recession just before this fall's congressional elections, with unemployment soaring and paychecks plummeting.

The spectrum of stagflation and memories of the Misery Index (percent unemployment plus percent inflation) lurks along the Potomac. (To the extent blame is shifted to the Iraqis, reelection prospects are rosier.)

Former chairman of the Council of Economic Advisers Charles Schultz (among others) said the price run-up in oil is unwarranted by the realities of the situation. But most believe the oil price reflects a 60 to 80 percent belief in the likelihood of war.

"My No. 1 advice to the president would be to open the Strategic Petroleum Reserve," said Schultz. "The answer to oil shocks is...big stockpiles and the willingness to use those stockpiles."

A flow of half a million barrels a day should bring the price of oil below $30 a barrel. (The long-range forecasts of oil prices discussed by Pennsylvania Power and Light and by DKB Securities were $20--$25 per barrel through the 1990s.)

Arkansas Business Shocks

The spreading slowdown will probably move from resort and retirement real estate companies -- e.g. Fairfield -- into durable goods, which get postponed during recessions.

In a recession, Arkansas firms producing and handling staples and lower-end goods should do relatively better than durables and luxury items: Wal-Mart, Tyson's and utilities will ride the recession better than appliance and furniture dealers, tourism and Dillard's.

Business profits and wage incomes decline; business and personal bankruptcies will increase. Bank bottom lines will bite the bullet as loans don't get paid.

On the up side, recession would deepen and broaden the interest rate cuts probable from the Fed. Those Arkansas sectors that are interest-rate sensitive -- housing construction, real estate, auto industry suppliers, furniture and appliance dealers (all already in recession) -- will find one element of their sales improve as interest rates decline. On the other hand, a negative effect would result from a decline in personal incomes.

Secretary of Defense Cheney said, "Our Military forces will be downsized 25 percent or more in the next five or six divisions, ships and bases. Congress will realize we're going to cut bases proportional to people."

Arkansas defense industries -- based at Camden and Sheridan -- could face declining contracts. There may be reductions of forces at Jacksonville and Blytheville.

Keep Eating That Chicken And Rice

Two Arkansas firms expected to perform relatively well in a recession and benefit from exports out-pacing the domestic economy are Tyson's and Riceland.

Both produce staples, for which demand should remain high. Both have expanded rapidly in export markets (e.g. to Japan, the Middle East, Europe and China).

Recent developments in Japan and the Soviet Union cast some clouds on the Arkansas economy. The recent plummet in the Nikkei, from around 39,000 to about 20,000, could slow the booming Japanese economy; so will higher energy prices. A slowdown in Japan would have direct effects in Arkansas, on Tyson's and TCBY particularly.

The NABE conference discussed a much greater unknown, with possible greater effects: the budding economic crisis in the Soviet Union. Severe strains in several sectors, including consumer goods, suggest the present recession in the USSR could deepen into major political and economic upheaval.

This would overshadow the positive contribution of opening Eastern Europe to trade opportunities, with Arkansas firms such as Orbit Value moving into previously closed economies.

The NABE economists and officials discussed forces and events that will hurt and help various elements of the Arkansas economy:

* Natural gas -- should benefit both from the increase in oil prices and the increased concern about the environment, soon to culminate in the Clean Air Act (now in congressional conference committee.)

* Transportation -- Trucking, more fuel-price sensitive than railroads and waterways, should be doubly hit by the slowdown and diesel inflation.

* Arkansas banks -- face higher cost FDIC insurance, the continued recession in real estate and a downturn in corporate profits (with consequently fewer loans and more delinquent loans.).

PHOTO : BAD TIMES COMING?: A gathering of 500 economists in Washington, D.C., last week were

PHOTO : unanimous in their conclusions that a recession is coming in America.

Robert Johnston, Ph.D., is an economic and regulatory consultant. Dr. Johnston studied economics and politics at Oxford University and Columbia University.
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Author:Johnston, Robert
Publication:Arkansas Business
Date:Oct 8, 1990
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