The MacNeil/Lehrer Report; Faltering Economy

ROBERT MacNEIL: Good evening. There was good and bad news on the economy today, adding up to continued doubt about the prospects for economic recovery. The good news first: the government announced that inflation continued to moderate last month, the Consumer Price Index rising only .3% in August, for an annual rate of 3.3%. The other positive news came from Detroit. Auto sales rose in the latest 10-day measuring period in mid-September for the first time in nearly four months. The 13.4% increase was attributed to a strong push to get rid of left-over 1982 domestic models. Now the bad news: fresh claims for unemployment insurance rose by more than 600,000 for the fifth straight week, a sign of continued rises in the unemployment rate. The Commerce Department projected that the overall economy, measured by gross national product, grew by only 1.5% in the third quarter, well below what economists consider necessary to spell recovery. Treasury Secretary Donald Regan said today the economy has entered the recovery phase, but many private economists are more pessimistic. They point part particularly to a deep lack of confidence among American consumers. Tonight, with the Secretary of Commerce and two outside economists, the reasons for optimism and pessimism. Jim?

JIM LEHRER: Robin, before we go to some specifics, we want to get a quick overview, optimism/pessimism reading from the Secretary of Commerce, Malcolm Baldrige. Mr. Secretary, I assume you see optimistic things in terms of what's happening to the economy, correct?

Sec. MALCOLM BALDRIGE: Well, I try and be a realist rather than an optimist or a pessimist, but yes, I do see some optimistic signs. We're in an in-between period right now with signs going both ways, but I think we have reason for optimism.

LEHRER: Why? What specific reasons do you have?

Sec. BALDRIGE: Well, we've climbed out of the trough of this depression -- recession, I think in should be called, really. Minus 5% --

LEHRER: I was going to pick you up on that.

Sec. BALDRIGE: Well, minus 5% in the GNP, really, from October of 1981 through March of 1982; now we've seen for the next six months, last six months. GNP rising one to two percent. There is a big difference there. That shows that now we're in an interim phase between a recession and a recovery. I could go on, but --

LEHRER: Was that in fact a slip of the tongue when you said depression rather than recession, or was that kind of what it was?

Sec. BALDRIGE: Well, this is technically a recession. The reason for any slip of the tongue is this. There have been pretty good times in some of the segments of the economy, you know, high technology and the services industries and so forth, that have been, in many cases, not even in a recession. Good times. Some of the industrial plant, particularly heavy industry like steel and the automobile industries, they've been in a depression. I suppose putting them together, this is technically a recession, but it depends on what part of the economy you're in.

LEHRER: Well, looking ahead, you heard the news that Robin gave in terms of unemployment. Unemployment is going to continue to rise, though, is it not?

Sec. BALDRIGE: That's difficult to say. It could. But unemployment is a rather volatile statistic. It's a lagging statistic also. After a recovery starts, you still see unemployment at a high figure for two or three months because people don't start to hire again. But -- so I would not expect to see unemployment improve much until the end of this year or the beginning of next year.

LEHRER: When do you see the recovery beginning?

Sec. BALDRIGE: We've seen the consumer disposable income go up five out of the last six months. Now, that's income after inflation and after taxes, so that's what you've got right in your hand. We've seen, as a resultof that, savings rate go up to 7.5 -- the 7% area when it had been in the five and six percent area. Traditionally, when the consumer gets a tax cut like the President's tax cut in July, inflation is lower and so forth, and his disposable income goes up; that's saved for two, three or four months, depending on the time, and then he begins to pick up his spending. When the spending picks up, that's when the factory pipelines have to be refilled, that's when employment picks up. I think we'll begin to see that process start something in the fourth quarter.

LEHRER: Fourth quarter meaning this year?

Sec. BALDRIGE: This year.

LEHRER: All right, thank you. Robin?

MacNEIL: First to comment on Mr. Baldrige's expectations, we have an expert on how the American consumer looks at the economy. Fabian Linden is director of the consumer research center for the Conference Board, an independent business research organization. For 15 years they've been surveying consumer confidence nationally, and their latest report finds it low. Mr. Linden, first of all, why do American consumers lack confidence? What are the chief factors?

FABIAN LINDEN: Well, at this particular moment, obviously, the high level of unemployment is a very important factor.

MacNEIL: Can you spell that out a little bit?

Mr. LINDEN: Well, we now have something in the neighborhood of 9.8% of the total labor force without jobs. We have had now for most of this year, or almost the last eight or nine or 10 months, an unemployment rate in the neighborhood of nine-plus percent.

MacNEIL: What does that mean in actual numbers of people, or the percentage of the workforce that has experienced some unemployment during this period?

Mr. LINDEN: A very important relevance. Actually, the number of persons employed at any particular time are obviously unemployed, happily, for a relatively limited-time interval. So that if you get a figure, for example, of 9% unemployment over a full year, those who are unemployed at the end of the year are, for the most part, not the same individuals who were unemployed at the beginning of the year. And so the statistics indicate that we have to use as a multiplier approximately 2.5 times as many --

MacNEIL: Who have experienced some unemployment?

Mr. LINDEN: Who have had at least one episode of unemployment in the course of the year.

MacNEIL: And that makes them nervous as consumers?

Mr. LINDEN: And that adds up to the neighborhood of 20-plus percent of our labor force who have been without a job at least once in the course of a 12-month period.

MacNEIL: Let me ask you this. The things the Secretary has mentioned, with a tax cut coming into effect, with interest rates falling -- which he didn't mention. Wall Street rallying, why is consumer confidence not growing in spite of the unemployment experience?

Mr. LINDEN: Well, first of all, the unemployment experience is a very profound one, and it's a very pervasive one, and it's not in spite of, but it's really the hard-core of the issue, and that is, you -- as indicated with a 9% average -- you've got something in the neighborhood of 20-plus percent of your labor force that will have had at least one incident of unemployment in the course of the year. And the average stint of unemployment is roughly 14 to 16 weeks, so that you can see that it makes a tremendous dent in the family that's inflicted with this event.

MacNEIL: Sure. What is the average American consumer, from your survey, not doing or planning to do that shows this lack of confidence?

Mr. LINDEN: Well, the lack of confidence is most profoundly reflected in the consumer's assessment of the present situation. And in the 15 or so years of our survey, we have never picked up a greater degree of disenchantment with the ongoing scene as is the current situation. For example, currently, in looking at the employment situation, some 60% of our survey respondents claimed that jobs are hard to get -- a tremendously high number in terms of the past experience. Similarly, almost a record high of those contacted -- over half -- classfied present conditions as being bad. So that the consumer is quite restless with the present business circumstances.

MacNEIL: You heard what the Secretary just said. He said that there may be a pause of three or four months, and that after that, with these other factors that he mentioned, the consumer is going to get back into the game. What's your response to that?

Mr. LINDEN: Well, the Secretary has said quite correctly that unemployment is a lag indicator, and that once the economy is on the upswing the level of unemployment tends to persist, for technical reasons which are not terribly important at the moment. So that the fact that unemployemt is high at this particular moment does not necessarily mean that we're still in a severe economic turndown.

MacNEIL: But does your survey show that he is justified in claiming that in about three or four months the American consumer will find his confidence again?

Mr. LINDEN: Well, justified is a rather difficult term to amplify on. There are some signs in our survey -- namely, we ask a number of questions concerning the future, the consumers' expectations. And the expectations of consumers have proven to be a rather good lead economic indicator. And since April or so, the consumers' expectations have been moving up. We did experience a drop in August, a rather large one, after four months of increase, but the latest figures we have in, for the last day or two, for the month of September, indicates that that particular series has turned up moderately again.

MacNEIL: Well, thank you. There is a group of prominent economists who continue to took somewhat pessimistically at the present situation and how that affects the prospects for economic recovery. One of them is Sam Nakagama, the chief economist for the Wall Street investment firm of Kidder Peabody & Company. Mr. Nakagama, why are you pessimistic about the present situation and how that affects the prospects for a recovery?

SAM NAKAGAMA: I'm pessimistic in the sense of regarding the situation at this point as very serious. Now, I think that Mr. Baldrige did give quite a realistic view of the current situation. As a matter of fact, I think if you say deep recession fast enough, it doesn't make a difference whether you're saying recession or depression.But at any rate, you've got to notice that you've had, as you mentioned, a spectacular rise in unemployment claims here, and so you're seeing the highest rate of unemployment claims in this recession. So that suggests that you're having a very wide range of layoffs going on in the economy, and I think that shows quite clearly that you're going to have about 10% unemployment in September. And, by the way, that is going to be the last one before the elections. Also, there is something called the leading indicators, which was invented by the National Bureau -- the coincident indicators and so forth -- and the coincident indicators have had a perfect record of spotting the bottom of a recession for the last quarter century. And that index is still goingdown and will go down again when it comes out for August.

MacNEIL: So you don't quite agree with the Secretary that we've passed the trough?

Mr. NAKAGAMA: Well, so far, you see, it's -- you know, by this, their own series, the series that the Commerce Department is putting out, when it comes out it will show the coincident indicators still coming down in August. At the same time, but almost certainly, the leading indicator, which is supposed to be barometric, are going to show a decline in August also. Now, this is going to be quite an unusual event because people have gotten encouraged by the fact that the leading indicators had been rising for four months in a row. And so all of a sudden you're going to see a drop for August. Now, also, I want to point out that we're having a worldwide relapse, in my view. I think the European economy is coming down; the German industrial production index dropped six points in two months here. I think the Japanese economy is slowing. So you're in the midst of a worldwide slowdown, so that it's very important that we have a pickup, and it's very important that we have a pickup sometime during the fourth quarter.

MacNEIL: Do you see one?

Mr. NAKAGAMA: I think that what you really need, of course, and what's happening, you see, is that we've had an interest-rate structure that prevents the recovery, and particularly, we've had an interest-rate structure that has kept, up to this point, mortgage rates and installment credit rates so high that the consumer is not able to afford to buy cars and durable goods. And so you probably need a further downward adjustment here, but the fact it that the most positive thing that has happened lately, of course, is the big drop that we've had in rates, and you probably need some more here. And that is the thing that has been blocking the recovery.

MacNEIL: The five Federal Reserve Bank presidents told Congress in testimony today that it was imperative in their view that the tight-money, anti-inflation Federal Reserve policy continue.Do you agree with that?

Mr. NAKAGAMA: It depends on what they mean by that. Now, they may in public mean that they sort of have to stick to the monetary growth targets, relatively speaking, because I believe that they don't want to lose confidence that way. They don't want the financial community to lose confidence. But I think, on the contrary, I do believe that we're at a very critical point, given where the world economy is now, the whole world is looking for the United States to lead the recovery, and so far it is not there. And at the same time, despite the fact that there has been this latest pickup in auto sales, this is sort of the last gasp because they're trying to clear out their inventories, and their inventories have been at a record rate for this -- record height in terms of day supply for this stage of the year. So that that even now is not a very good augury. So it's very important that we have a pickup in home sales, auto sales and other durable goods over the next one or two months. And if that doesn't happen, then I would argue you're going to have continuing weakness. So it's very important that this happens.

MacNEIL: Do you think it's going to happen?

Mr. NAKAGAMA: Well, I think it's very important that we have a, I think, a continuing downturn in rates here.

MacNEIL: Well, thank you. Jim?

LEHRER: Mr. Secretary, do you see us being at the same critical point that Mr. Nakagama sees us at?

Sec. BALDRIGE: I think our only difference would be on the emphasis. I'll probably get all economists and businessmen mad at me now, but --

LEHRER: Be my guest.

Sec. BALDRIGE: All right. Before I came to Washington, I had been a chief executive officer of two different industries through six recessions, and I've listened to other businessmen, other economists, going into a recession, in the middle of it and coming out. And I've concluded one very simple fact. Businessmen and economist are too optimistic too long on the way into a recession -- they don't want to believe they're in one. And they're too pessimistic too long coming out.You know, anybody can say we're in a recovery three months after we're in it, but it doesn't do any good to call the turn then. Right now is a difficult time to call the turn, and the signs I see lean more toward the fact that we are going to see the consumer start spending more, certainly in November and December this year, perhaps in October. When Mr. Nakagama talked about the leading indicators, they are also a volatile kind of statitic. They've been up for four months in a row. It's true, they'll probably be down in August, but it's also true, I think, anyway, that they'll be back up again in September. We're in this interim period now, and I think there are more forces to push the consumer away from saving the increased income he's getting, and towards spending.

LEHRER: What are those forces? What's going to cause these -- you say these folks have put the money in savings for these last three months, and now they're going to go out and start spending that in November and December. Why?Why are they suddenly going to do it?

Sec. BALDRIGE: Well, not all of it.

LEHRER: Not all of it, no.

Sec. BALDRIGE: Well, I'll tell you, one of the reasons is the average age of automobiles in this country is perhaps at its highest ever. I mean, people need new cars. Housing has been so depressed for so long that there's a real pent-up demand for housing. And we're seeing interest rates go down. That's going to affect both of those areas. And he's going to spend -- the consumer will spend on the things he feels he really needs.Now, let me emphasize, what I'm talking about is a moderate recovery. I'm not talking about a big flashback like we've had before that was fueled by inflation that just brought the seeds of the next recession right along with it. This is a moderate recovery. Inflation next year is going to be as low as it is this year, and that's going to help keep it a sustained kind of a recovery even though it's moderate.

LEHRER: I'm not an economist nor a businessman. Explain to me, when you say "moderate recovery," what do you mean by a moderate recovery?

Sec. BALDRIGE: Well, that's a question of semantics. You know, that depends on which side of the table you're on. I think we're talking, as the GNP has been increasing one to two percent lately after dropping off 5%, we could see that one to two percent become two to three percent, and then next year, somewhere between three and four percent. If we can pull that off without a rise in inflation, it'll be the first time coming out of this after -- to my knowledge, in about four or five recessions. And that's -- for the long pull, that's what we want to do.

LEHRER: Well, how is that going to happen? Because usually inflation usually tags right along, doesn't it, if the recovery goes too --

Sec. BALDRIGE: You say "usually." In the last 15 years, it has, if you want to use "usually" then, because of government policies. We've changed those government policies now. I mean, we've got an anti-inflation program that's working. And as long as we keep to that, we see no reason for inflation to go up next year. I think it'll be in the 5% area like it is this year.

LEHRER: Mr. Nakagama, do you think the administration has an inflation policy that's working?

Mr. NAKAGAMA: Well, my complaint about that, it seems to me that the -- now I think they've changed their mix. As a matter of fact, I think they're changing their basic approach very substantially over the course of this year, and I applaud the changes that have been made, but I think that to the extent that the anti-inflation policy has been based so much on tight money, I would argue it works like strategic bombing: it works by bombing Detroit and Chicago and Pittsburgh, and so forth and so on. So you get these very low operating rates, and you get these very low auto sales, etc. And so it has worked through these extraordinary real interest rates, which has been the thing that has blocked a recovery because it has blocked the consumer from dis-saving. In other words, the savings rate is determined by the dis-savings rate, and to the extent --

LEHRER: Dis-savings meaning --

Mr. NAKAGAMA: Dis-saving being --

LEHRER: Money you don't save, right?

Mr. NAKAGAMA: Borrowing.

LEHRER: I see.

Mr. NAKAGAMA: And, you see, because the consumer has not been able to borrow for homes, cars and durable goods, which require credit, they haven't been buying them. They haven't been able to. It's been blocked that off, which is why you have home sales running at the bottom; you have auto sales running at the bottom; you have the steel operating rate running at the bottom and so forth and so on. And so, from that standpoint, now, the big plus here is that rates have come down over the last couple of months. And now I think perhaps a little bit more of that is necessary. But certainly the worst thing that could happen is that if you had a rise in rates at this point. It would break the back of the recovery.

LEHRER: You agree that if the rates -- if interest rates were to start going back ip it'd all be over, right?

Sec. BALDRIGE: Yes, but I don't think they will. Interest rates --

LEHRER: Why not? Why won't they?

Sec. BALDRIGE: Well, interest rates never go in a straight line. There'll be some zigs and zags, but there's more pressure on interest rates going down than there is to bring it up. And I think the real rate of interest is going to go down, too, because people are not going to expect future inflation like they used to.They used to build it in, and they're beginning to realize now -- not just the administration, but the Congress -- it was very politically unpopular to vote for the tax reform bill they just passed in an election year, but people are beginning to see that both the administration and Congress have the will to tackle the budget deficit problem. And I might add to Mr. Nakagama's point about tight money, I don't view this as tight money, really. I view this as moderate growth. And what is the alternative? The alternative was to allow the money floodgates to open, I guess, which would bring increased inflation, which would get us back in a situation like Mexico is now or Brazil or Argentina. I'm exaggerating a bit, but there's the same trend. So I think we've pursued the right policy, and interest rates are coming down, but we inherited 21 1/2% interest rates, and I think it's quite a feat to get them down to 13 1/2%.

LEHRER: Mr. Nakagama didn't come out and say it, but a lot of Democratic politicians say that your anti-inflation policy, that wasn't anti-inflation policy; you just have a recession. Anybody can bring inflation down if you cause a recession.

Sec. BALDRIGE: Well, you know, there are no alterantives that you've seen the Democrats bring out. There are no alternatives that I've seen perhaps 40 or 50 foreign state finance ministers, heads of state -- they all come over and complain about high interest rates. We say we didn't bring the high interest rates; we inherited them. Our policy is to reduce inflation.That's number one. That's what the people elected the President for. So we are reducing inflation. That's bringing the interest rates down. I've asked all of them, "What would you do instead? What's your alternative?" Never one alternative. And you're going to see other countries around the world following what we're doing right now because it's the only way to stop inflation and bring interest rates down, put people back to work.

LEHRER: Okay, Robin?

MacNEIL: Mr. Linden, I understood you to say that the chief source of consumer unconfidence, if that's a word, was the continuing unemployment situation. The economists say -- Henry Kaufman, who has been very prominent in making predictions about this recession and having quite an effect on Wall Street confidence, said today he doesn't believe the economy will grow enough over the next year to alleviate corporate profit or unemployment problems. If they're projecting over the next few months one to two percent growth in GNP, is that enough to bring unemployment down, and if unemployment doesn't come down, are the consumers going to get as confident as the Secretary predicts they are?

Mr. LINDEN: Well, certainly if unemployment persists at this level or does not come down, it will be very difficult to anticipate any significant improvement in consumer confidence. The real issue is whether or not unemployment will persist. It becomes a circular argument.We say that if unemployment persists, well, then obviously we're not going to have a recovery; if we have a recovery, then unemployment will not persist. It's a very circular kind of argument.

MacNEIL: How can you get unemployment down and thereby restore consumer confidence, Mr. Secretary, if growth is only going to be one to two percent GNP, as I think you just said, until well into next year, when it may go up, you said, to four to five?

Sec. BALDRIGE: Well, I don't believe I said that, Robin. I said that we've had one to two percent growth in the GNP in the second quarter of this year and in the third quarter, the one we're presently in. That's as opposed to GNP going down 5% for the two previous quarters. So we've come from minus five up to a moderately level situation. And in the fourth quarter, we ought to be able -- we should begin to see some higher growth rates than that, perhaps two to three percent. I don't know yet. But next year we'll see three to four percent certainly.

MacNEIL: Do you agree with Mr. Linden that in order for consumer confidence to revive you have to get unemployment starting downward?

Sec. BALDRIGE: I think they happen at the same time. It's kind of like the chicken or the egg. There are 101 million people employed in this country, and when they begin to spend, when the factory pipelines have to be refilled as a result, it begins to bring the unemployment down. They don't happen exactly at the same time. First, we're going to have to see consumer spending pick up, but I think we will. On these automobile sales, I do not think that's a fluke. I don't mean that they'll stay at the annual rate of 7.1million, but that's a trend that's up from August, July, and the first 10 days of September. The same on housing. We've seen four -- three quarters now of increased housing sales -- not a great momentum upward, but the trend is in the same -- in the area. You see an economy struggling to come out of a recession, and it -- we'll begin to see more signs as this year unfolds.

MacNEIL: Let me raise one final point, starting with you, Mr. Nakagama. Some economists -- I wonder whether you're one of them -- fear that the rate of government borrowing that's going to be necessary in the last quarter of this year to finance the deficits that have already been voted, leave aside what they may be in the future, is going to put such a strain on the financial markets that that will drive interest rates back up again. What is your view of that?

Mr. NAKAGAMA: I don't believe that will happen in the fourth quarter, and I doubt that it's going to happen maybe for the next two or three quarters. But I think you have to worry about that down the road as you look toward '84 and '85. And that could be a very serious problem.

MacNEIL: And is that of a time that it could break the back of the recovery as you predicted a moment ago high interest rates could do? What is the timing on this?

Mr. NAKAGAMA: Well, I'm not arguing that that's going to happen then. But yes, that's going to become a very serious problem, and so that it's going to be something that the administration and the Congress are going to have to deal with next year.

MacNEIL: What is your comment on that, Mr. Secretary?

Sec. BALDRIGE: I agree with Mr. Nakagama, incidentally, whose opinions I respect on a great many subjects. He said the administration and Congress are going to have to deal with this. I don't think there's any doubt in people's minds about the will and the resolve of the administration and the President to want to reduce the budget deficit by cutting expenditures. It's Congress's will that's at question, and if Congress has the will to also do that, we will be able to handle the budget deficit problem. If they don't, we're going to be in trouble.

MacNEIL: I have to leave you there. Thank you very much for joining us this evining, Mr. Secretary, Mr. Nakagama, Mr. Linden. Good night, Jim.

LEHRER: Good night, Robin.

MacNEIL: That's all for tonight. We will be back tomorrow night. I'm Robert MacNeil. Good night.