WASHINGTON -- The Federal Reserve's key policy committe met yesterday to ponder the latest surprise of this most unusual of recoveries -- the return of inflation.
That prices should be rising when demand is depressed, industrial capacity under-used, consumer confidence low and unemployment high defies economic logic.
Inflation so far this year is averaging an annual 4.2 percent, a worrying advance on last year's 2.9 percent. Yet economic growth this year is expected to be only around 3 percent, still less than half the normal expansion rate of previous postwar recoveries.
The Fed's policy-making Open Market Committee, which met privately yesterday, was not expected to put an immediate squeeze on the emergent inflation by increasing interest rates. The reason: The economy remains so weak overall that any tightening of money could push it back into recession.
The latest spurt of inflation was driven by food and fuel price rises, caused by the bad weather, and a post-Christmas effort by retailers to increase their profit margins. It is likely to be temporary as the weather improves and prices retreat to more salable levels. This has been a recovery like no other, a hesitant on-again, off-again comeback for an economy that sets its own style and disregards old patterns.
More than two years after the recession officially ended, there are just about as many jobs now as there were when it started. Typically, there would be millions more.
The sort of energetic bounce that has carried the country rapidly off the floor of previous recessions has not happened this time.
"I don't know anybody who is predicting a real rosy growth picture for the next five years," said Jeff Faux, director of the liberal Economic Policy Institute.
The major hurdles to an accelerated recovery (and the time needed to overcome them):
The Clinton administration will cut defense spending in fiscal 1994 by $12 billion more than the Bush administration had planned, scaling back the military budget to $263.4 billion. Through 1998, the cuts will amount to $127 billion. This will reduce the economic importance of defense spending from a peak of 6.5 percent of gross domestic product in 1986 to 3.2 percent by 1998.
Between 1992 and 1998, 1.2 million defense-related jobs are expected to be lost. This represents 0.9 percent of the total 1992 labor force. Of Maryland's 150,000 defense-related employees, 24,600 are likely to lose their jobs, according to a study by the Defense Budget Project, an independent research group based in Washington.
President Clinton has introduced a conversion program to retrain workers and funnel defense research money into the civilian sector. In the long term, the shift in resources could boost the civilian sector. But the cuts will inflict painful short-term dislocation, worsened by the weak economy and lack of jobs.
Time estimate: Three to five years for individual companies and hard-hit regions to replace lost jobs, five to 10 years for the long-term benefits to accrue, according to Erik R. Pages, director of the defense transition project for the Business Executives for National Security.
In many areas, too much office and apartment space was built in the 1980s, when the economy was booming and tax breaks made it worthwhile for investors to construct buildings that might remain empty. Today, the surplus of office space depresses the market, stalls investment and blocks hiring by construction and real estate firms.
An index of new commercial construction contracts, compiled by the Mortgage Bankers Association of America, rose from 100 in 1982 to 150 in the mid-1980s before plummeting to around 70 in 1991, where it has remained since.
Office vacancy rates in downtown areas tell the same sorry tale: below 7 percent in 1982, up to 17 percent in the mid-1980s and still persisting at that level. Apartment vacancies have followed a similar trend, and building starts on multifamily units dropped from 600,000 in the first quarter of 1986 to 100,000 in the first quarter of 1993.
"There is no sign of any pickup at all," said Lyle Gramley, economist with the Mortgage Bankers Association of America.
Time estimate: Three to five years to work through the existing building surplus, Mr. Gramley said.
This is critical to recovery because consumer buying represents two-thirds of the nation's economic activity.
The authoritative Index of Consumer Confidence, compiled by the Conference Board, a New York-based business organization, showed signs of a convincing recovery after the presidential election late last year, only to drop back into the doldrums this year. A reading of between 80 and 100 on the index reflects a healthy economy and confident consumers. In October last year the index was at a woefully low 54.6. By December it had risen to a more cheering 78.1. But by March this year it was back to 67.7, reflecting mainly enduring job insecurity and uncertainty over the Clinton administration's economic policy.
"Confidence in this recession has behaved in a somewhat more turbulent way than in the previous recession of 1982, where once confidence began to go up, it gained momentum and went up very rapidly," said Fabian Linden, executive director of the index.
Time estimate: Improvement within the next three or four months -- "simply because we have been so long in the doldrums here," according to Mr. Linden.
Announcements seem to come almost weekly as thousands of workers, many of them white-collar employees, lose their jobs with slim prospects of being rehired.
When the recession started in July 1990, 5.4 percent of a total labor force of 124.6 million was unemployed. Currently, according to the Bureau of Labor Statistics, unemployment is 7 percent of a labor force of 127.3 million.
If a normal recovery had occurred in the 25 months since the recession, as many as 4.8 million more jobs would have been created, according to the congressional Joint Economic Committee.
One positive result of the layoffs is that many U.S. manufacturing and service companies are more efficient and competitive. That leads Donald Ratajczak, director of the Economic Forecasting Center at Georgia State University, to believe that the Dow Jones industrial average, currently in the 3,400s, could top 3,700 by the end of the year.
Time estimate: Three to 3 1/2 years for unemployment to drop to between 5 and 5.5 percent, which is considered full employment by many economists, according to Mr. Ratajczak.
Banks, chastened by the savings and loan debacle and zealous federal regulators, became so risk-averse that they advanced credit during the first two years of this recovery at little more than one-third of the rate maintained during the same period following the past five recessions.
This particularly hurt small business, the central generator of job creation. An American Bankers Association analysis of the credit crunch said: "Added up across all banks, the negative lending environment has had serious consequences for economic growth."
Mr. Clinton eased bank lending regulations in March to spur the flow of credit.
Time estimate: Some banks have already introduced easier credit, and others are expected to follow quickly as the regulatory reforms have their impact.
Throughout the U.S. recession, exports provided a rare bright spot in an otherwise bleak economic picture. In 1990 the United States sold merchandise worth $393.6 billion overseas. In 1991 the figure was $421.6 billion, and in 1992 it reached a record $448.1 billion.
But over recent months exports have been falling, as major trading partners in Europe and Japan fight their own recessions, undercutting the foreign market for U.S.-made products.
The Clinton administration, like the Bush team before it, has been pressing Japan and Germany to boost economic growth to increase demand for U.S. imports.
Mr. Clinton has also embraced a tough trade policy, threatening both the Europeans and Japanese with reciprocal action against unfair trade practices.
Time estimate: Overseas demand will remain depressed for at least six months to a year, according to Sung Won Sohn, chief economist of Nor- West Corp. in Minneapolis.