Optimists are betting that Norman Schwarzkopf is as good an economist as he is a warrior. Their reasoning: Saddam created the recession with a one-two punch to consumers. The invasion of Kuwait shattered willingness to spend, while rocketing oil prices shrank purchasing power. Under this scenario, the U.S. victory will restore confidence and keep oil prices low. Federal Reserve Chairman Alan Greenspan has helped out, easing short-term interest rates by 2 points since November. With the causes of the downturn eliminated, the optimists view a rebound as automatic.
Trouble is, it isn’t happening. Residential construction is the only spark visible - an uptick in new housing starts in February provided the first hope for home building in three years. Elsewhere, construction and industrial production are sliding, retail sales are sagging and business investment is now falling away. Even the stock market’s getting nervous; the winter rally petered out last week with the Dow Jones industrial average losing 89 points.
Economist Edward S. Hyman thinks the problem is obvious. For over a year, Americans have had too little purchasing power and too much debt. Consumer incomes, adjusted for inflation, have actually declined by 1.4 percent in the past year (chart). “Victory.,” says Hyman, “does not restore pocketbooks.” Meantime, total debt is at record levels and growth in consumer and business borrowing has collapsed.
In this bind, only time and Greenspan - by pushing rates still lower - can work a cure. Even some Bush advisers are restless over the Fed’s caution. “Greenspan’s trying to tie his shoes,” Commerce Secretary Robert Mosbacher grumbles privately, “while his pants have fallen down.”
Greenspan says inflation is still a worry, and that he will push rates lower only if necessary. He may not have much time. His term expires in August. Bush, a personal friend, may tolerate the slump through the spring. But if recovery isn’t visible by summer, even a Teflon-coated Bush might want a Fed chairman who isn’t so sticky.
