Washington -- Why is the current recovery so stubbornly sluggish?
"Usually the economy jumps off the bottom [of recession]. We are really seeing a very slow momentum," said John Tuccillo, senior economist with the National Association of Realtors.
Three core elements are to blame: economics, politics and demographics. In no previous recovery have these three influences combined so powerfully to brake the speed of a comeback. They are expected to hold the annual economic growth rate to around 3 percent this year, half the typical pace of recoveries after previous post-World War II recessions.
"I am gearing my operation to the premise that what we have is what we are going to have," said John Pohanka, chairman of Pohanka Automotive Group, a Washington-based dealership with 13 franchises for domestic and imported autos. "I do not expect any great upsurge in sales."
Unless consumers suddenly shrug off their cares about debt burden and job security and go on an unexpected and wild spending spree, this is set to remain the slowest and most frustrating economic recovery on record.
A central economic problem: there is not much new spending on any level.
The federal government is fettered with a $400 billion deficit. State and local governments are strapped for cash. Corporate America is restructuring, cutting costs and work forces. Consumers are still catching their financial breath after splurging on borrowed money in the 1980s.
The federal deficit reduces government's flexibility to spend money on promoting growth. It also keeps long-term interest rates high. One of the main frustrations of this recovery has been the failure of long-term interest rates, crucial in setting mortgage rates, to match the decline of short-term rates. This has kept capital expensive, particularly weakening the housing recovery.
David Olson, president of his own research company in Columbia and a specialist in the mortgage market, said long-term rates historically have been 3 points above inflation. On that basis, with inflation currently hovering between 3.5 percent and 4 percent, long-term rates should be 6.5 percent or 7 percent. They are closer to 8 percent.
One reason, Mr. Olson said, is that the Germans and Japanese, facing their own economic troubles, are no longer as interested in financing the U.S. debt. Domestic savings here can't make up the difference, so rates stay high.
Several other factors are at play in making the housing and construction recovery weaker than usual. The housing recession was comparatively shallow, limiting the pressure of pent-up demand.
"In most respects it was relatively milder than usual recessions. The pent-up demand for housing was not nearly as great as it usually is," said Mark Obrinsky, senior economist with the Federal National Mortgage Association.
When housing starts, which had shown signs of recovery in the first three months of the year, suddenly foundered with a 17 percent drop in April, it was a somber reminder of how fragile the recovery is. The day before the housing report, President Bush observed, "As housing goes, so goes the economy."
Commercial and retail construction is in even worse shape. The overbuilding of the 1980s has left most city centers with surplus office and retail space. Baltimore, according to the Baltimore Development Corp., has an office vacancy rate of 20 percent and 250,000 square feet of surplus retail space. This means a lot of slack has to be taken up before new construction will be needed.
Baltimore's downtown situation is complicated by this year's scheduled delivery of 450,000 square feet more office space in the Commerce Place Building, only about a quarter of which has been leased. An additional 200,000 square feet will be added when CSX Transportation moves the last of its headquarters jobs from 1 Charles Place to Jacksonville, Fla.
"Companies are not experiencing the growth of prior years, but we have space that continues to be built," said Andrew Chriss, head of brokerage for Manekin Co. commercial realtors. "I believe the submarket of downtown Baltimore will be one of the slowest to return to what we view as normalcy."
Even the much-touted peace dividend appears, to some, to have the luster of fool's gold. The defense cutbacks mean fewer jobs in the military and defense-related industries.
"In the short-term, that puts a negative shock on the economy," said Rudolph Penner, director of economic studies at KPMG Peat Marwick. "By the short term, I am referring to two years. It's a long short term. In the longer run, it releases those resources and we will absorb them into more socially productive activities."
The consumer remains the key to speedier improvement. Consumer spending accounts for two-thirds of economic activity this society. To this day the consumer remains leery of new debt. Total consumer installment debt at the end of 1991, according to the Federal Reserve, was $728 billion, 1 percent less than at the end of 1990 and the first year-to-year decrease since 1958.
"Credit is the lifeblood of the economy," noted Jeff Faux, director of the Washington-based Economic Policy Institute, a liberal think tank. "If you don't have people willing to go into debt, to spend and invest, you are not going to get the growth.
Banks, still paying the price for the easy credit era of the 1980s, are imposing stricter lending criteria. The average borrower of an equity line of credit this year has a household income of $51,398, up 2.5 percent from 1990; has held the same job for 8.6 years, up from 8.3 years last year; and has owned the same home for 9.6 years, up from 9.3 years, according to a survey for the Consumer Bankers Association, which represents 800 federally insured banks, savings and loan institutions and credit unions.
Borrowers are also shifting their priorities. According to the survey, home equity loans were increasingly being used to consolidate debt rather than, as previously, to finance home improvements. This year, according to the survey, home equity lines were used for debt consolidation in 36 percent of the cases, up from 30 percent last year. Forty-three percent of second mortgages were put to that use, up from 34 percent.
"The decade of the '90s will be an era of conservatism, and people are going to be a lot less willing to extend themselves on major purchases and credit," said Bob Roderick, senior vice-president of First Eastern Bank in Wilkes-Barre, Pa.
Another reason for the slow recovery is politics. The presidential election campaign all but rules out any major legislative package for economic growth this year.
Washington typically responds to economic hard times with tax cuts or spending increases. But attempts earlier this year to fashion a bipartisan approach to fostering a recovery faltered over what should be done and who should pay for it.
The Bush administration favored tax breaks for investors as a means to stimulating growth, financed through defense savings. Democrats wanted to give the middle class a tax break and make the wealthy pay for it. Congress rejected or reworked the Bush proposals, and Mr. Bush vetoed the congressional package.
The final drag on recovery is demographics. Population changes are limiting growth in the demand for houses, autos and other goods.
Growth in demand for new houses has been declining for two decades. The annual increase in the number of households in the 1970s was 1.7 million. In the 1980s it was 1.4 million. In the 1990s, the Census Bureau expects it to be 1.2 million.
For automakers, the boom times are also long gone. After six quarters of losses totaling $11.8 billion, auto manufacturers managed to ring up a modest $500 million profit in the first quarter of this year. Today, not only are fewer first-time buyers entering the market, but car owners are keeping their vehicles longer as autos become more expensive in real terms, payment schedules are extended and the driving public gets older.
According to the Motor Vehicle Manufacturers Association, it took the average worker 18 weeks' pay to buy the average car in 1972. It took 22 weeks' pay in 1982. Now it takes 25 weeks' pay. The average term of a new car loan in 1972 was 35 months. In 1982, it was 46 months. Currently it is around 55 months.
"If you are rational you don't want to sell you car quick because you really take a hit," said James A. Mateyka, vice president of the auto consulting practice of Booz-Allen and Hamilton in Bethesda. "What has happened over time is we have gone from a three-year trade cycle to a four-year trade cycle, and now to a five-year cycle."