Can we avoid recession?

By Alan M. Gayle Qrporate Economist United Virginia Bank

T"t CURRENT expansion that I began in November, 1982, has lasted three years. That is beginning to get old by historical standards.

Knowing the age of an economic upswing has never helped forecasters accurately predict the coming of the next downturn, but it would be a mistake to ignore or dismiss the signs of age as temporary aberrations.

1985 has been a difficult and confusing year for economists, because the economy weakened in the first half of the year, only to show renewed strength in the third quarter. The drop in interest rates helped to suppc:rt the housing industry during this time, but it failed to spark new life in this sector.

The primary rquon for this is that the consumer who has been the driving force for this expansion, has been dipping into savings and loading up on debt to maintain his living standard. This kept the economy from falling into a recession early in the year, but it took its toll. The personal savings rate is now at or near its alltime low, while the level of debt relative to income is at an all-time high. This suggests that the consumer is severely extended, and, ifthe past is any guide, the consumer will begin to pull back relatively soon.

Businesses have been very cautious during this recovery and have successfully held inventories in check. This tended to curtail growth in 1985, but this conservative approach could pre- vent lay-offs should the economy weaken. The strength of the dollar has caused significant damage to our balance of payments position and cost the United States countless jobs. With some luck, the decline in the dollar since its first quarter peak should begin to improve the trade picture in the upcommg year.

The major question for 1986 is if the consumer stops borrowing to finance the expansion, can the loss be made up by either the business sector or by foreign trade? The answer is that it could help, but with consumption representing two-thirds of the economy, any uptick in business spending or exports will probably not offset a decline in personal consumption. Autos have already begun to lose ground following the end-of-year surge, and the housing sector is showing early signs of weakness. This pattern is likely to get worse before it gets any better.

The Congress, facing a slower economy and an election year, is not going to be anxious to either cut spending or raise taxes. As a result, we can look for the federal deficit to rise to perhaps $220 billion from $203 billion in fiscal vear '85.

Story at a Glance

One bright spot in the outlook is that interest rates could fall further as we enter 1986. The Federal Reserve has stated that domestic economic concerns have considerable influence on current monetary policy, and with good reason. The Fed knows that it cannot continue its anti-inflation policy politically if the economy is faltering. This may help the housing and auto industries by the middle of the year. For 1986, I look for real growth of about 2s/o or less on the average, with inflation inching up to the 4Vz-Svlo range due to the weaker dollar.

In sum, 1986 could be an exciting year, but not the kind of excitement we enjoy. Real growth should be disappointing, but inflation should remain low with interest rates falling to somewhat more palatable levels.

Vereen

(Continued from page l9) fastest way to cut expenses is to reduce payroll, or to hire more part-timers. Both conflict with the need of home centers to man their floors with qualified people, especially if there is any hope of building project sales, rather than promoted-item sales.

Recognizing this problem, Home Center Institute is embarking during 1986 on a new employee training prograrn that attacks the basic need of developing selling skills.

One may still need to control payroll exp€nses, but the best way to do that is not by cutting back on people but by making people more productive. Retailers need to do something to teach the basics of customer relations and selling skills to their employees.

One may have to fight for customer business on price. The market may leave no choice. But qualified employee service is what will build repeat (and addon) business.