Recessionary woes take us back to basics.
This is affecting attitudes, and, in turn, the economy as well. For one thing, employment levels today are further away from where they were when the economy peaked than they usually are at this point in the cycle. Obviously, this implies a tougher time finding work for those who are jobless. In turn, this is keeping people (both employed and unemployed) from spending as much as they might have at this point in the past, the economy stopped declining.
You can see where this is affecting business strategies. The ongoing sluggishness in consumer spending, combined with the generally cautious attitude on the part of many executives, is causing many firms to try to operate with only the barest minimum of inventories. This policy apparently gives many business people a feeling of security, in that if sales should suddenly collapse, they will not be stuck with large amount of unsold goods. Naturally this also represents a way to save money, since goods produced must be paid for even before they are sold. The money to pay for goods that wind up on shelves is usually borrowed, so the less unsold goods, the less money must be borrowed - and the less interest expense business incurs. Not surprisingly, most bankers, who judge business activity by the demand for loans, will tell you that business remains soft.
There is no doubt in my mine that we have entered a new era - one of lowered expectations. You can deduce this from business hiring practices - which continue to be modest, at best. Many firms are apparently still smarting over the bulking up they did in the 1980's, when they added layers of management and support staff in the belief that the markets they were in would grow indefinitely - not to mention the fact that it was the trend du jour. Today's in thing among senior corporate managers is to be as lean and mean as possible and assume that markets will continue their present trend of growing only slowly - if at all. Like many trends, this, too, will not endure. However, while it prevails, it only serves to darken the mood of both businessmen and consumers, and, of course, to perpetuate today's slow-growth economy.
If the past is any guide, don't look for any sea change in people's attitudes anytime soon. Recently, I discussed the role that human nature plays in the business cycle. People tend to try to take advantage by raising prices and/or wages, when demand for a product or service overwhelms supply; they'll do this until they've priced themselves out of the market. It usually takes a while before people realize that they've gone too far - and that goes, not only for pricing, but for other notions, such as caution when it comes to hiring, inventory accumulation, buying new machinery, etc.
These trends last so long, they tend to be identified with entire decades. You all have heard of the Roaring 20's. This was the decade that followed World War I, and the end of wartime restrictions on business and consumers (the Sober Decade). It brought sweeping changes to American life, as the U.S. economy entered a period of spectacular, though uneven, economic growth. Spurred by good times and a desire to be "modern," Americans adopted new attitudes and lifestyles; people moved from farms to in record numbers. The for such features of modern life as the automobile, telephone, radio and electric washing machines soared.
These good times extended to Wall Street - until the stock market crash of 1929. This sent shock waves through the financial community. Banks severely curtailed their loans to business, which, in turn, cut back production, leading to the Great Depression of the 1930's. The aftermath of the over-exuberant 1920's, the 1930's saw thousands of businesses fold and millions of workers lose their jobs. Overleveraging and poor weather forced large numbers of farmers to abandon their farms; they moved to the cities to join the vast army of unemployed urban dweller. In an effort to shore up domestic business, Congress passed, and President Hoover signed into law, the Smoot-Hawley Act, restricting imports. Other countries retaliated, which hurt U.S. exports, deepening our downturn.
Notwithstanding the efforts of President Roosevelt and his New Deal economic program, hard times dragged on until the advent of World War II, and the stimulus of a huge jump in military spending. The 40's were years of substantial growth. Auto plants and other factories had to be converted into defense mills for the production of planes, ships, tanks, and other weapons of war. Unemployment disappeared rapidly as men first found work in these factories, then were called up to serve in the military. Restrictions on civilian spending were imposed to free resources for the war effort. This led to pent-up demands, which, literally, exploded once the war ended. Returning veterans and their families bought products not previously available, such as new cars, refrigerators, etc.
Bolstered by labor unions, workers' buying power rose to the point where many were able to afford to buy a house, so the move to the suburbs began. Naturally, this led to a surge in construction of homes, schools, shopping centers and roads, fueling a rapid increase in jobs, hence, more growth in buying power. Unfortunately, prices jumped rapidly as well, setting the stage for the consolidation of the 1950's. Known as the Silent Generation, Americans, following the end of the Korean War, turned inward and concentrated on social reforms. The move to the suburbs slowed, and many localities began to impose restrictions on new building, leading to a slowdown in construction. A conservative economic policy cooled inflation - but at the cost several recessions.
The 1960's quickly became known as the Soaring 60's. Pushed ahead by stimulative economic policies and by the progressive growth in military spending associated with the war in Vietnam, the U.S. economy registered its longest expansion in history - a record 106 months - between February 1961 and December 1969. Economic growth soared and the unemployment rate fell to a postwar of just over three percent. However, the Johnson Administration's fiscal policy, which called for no increase in taxes to finance both increased military spending as well as greater outlays for domestic purposes (Guns and Butter), along with an accommodating monetary policy, laid the groundwork for the inflationary 1970's.
Dubbed by some, the Hangover Decade, the 1970's were marked by rapidly rising prices as an aftermath of the stimulative policies of the 1960's, unusually bad weather affecting the Nation's crops, a deal with the Soviet Union which tied up the country's two freezes and four phases of price controls-and, of course, a massive jump in oil prices twice engineered by the Organization of Petroleum Exporting Countries. If these developments weren't enough to depress people, attitudes were severely battered by political scandals; both the President of the United States and the vice president resigned within a 10-month period.
The spurt in energy prices reversed several trends of the postwar era which fueled economic growth. It caused people to turn away from the suburbs and back toward the cities, which were more energy-efficient. It also encouraged, people to stop buying American cars, which were large and got poor gas mileage, and turn, instead, to foreign cars, which tended to be smaller and much more fuel efficient. And it also caused many companies to substitute labor for equipment. This was an attempt to offset the rise in energy costs - but it led to the overstaffing and poor productivity that was to characterize the 1980's.
The 1980's started out in reverse. The economy was in recession for most of the decade's first three years before responding to the stimulus provided by the Reagan Administration's Economic Recovery Tax Act of 1981 (ERTA).
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|Title Annotation:||Review and Forecast, Section I|
|Author:||Kellner, Irwin L.|
|Publication:||Real Estate Weekly|
|Date:||Jun 24, 1992|
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