With government spending rejected as a stimulus, Americans have become dependent on low interest rates to revive the economy. But low rates alone cannot expand the economy any faster than the slow pace at which it is now growing.
Housing and auto sales have risen as a result of low rates, which make financing more affordable, and retail sales have also benefited. But a wide range of economists, executives and industry experts say that low rates cannot alone squeeze much more out of these key industries, unless obstacles like wage stagnation and high prices of some homes are overcome.
"It will be very hard to get the economy to grow more rapidly than it now is growing," said David Wyss, chief economist at Data Resources Inc., a consulting and data-gathering company. "Can low interest rates generate enough jobs and income to offset the work lost in defense and other industries? Maybe they can in the very long run, but not now."
Previous recoveries since World War II have benefited from incentives besides low rates, including strong export growth, a rush by companies to replenish inventories and rising employment as business picks up. For various reasons, all these have been absent lately.
Of course, if economic growth stalls -- as it seems to have done in the second quarter, when the growth rate fell below 1 percent -- Congress could revive economic-stimulus measures, as President Clinton had requested at the outset of his term.
The failure of the economy to expand at an annual rate above 3 percent, the minimum considered necessary to bring down unemployment, has bolstered the determination of some Clinton administration officials to try yet again to win approval for government spending on public works to create jobs.
"If it were not for the political environment, the ideal scenario would be a strong stimulus, and then once the economy was back on track -- growing at 3.5 percent a year or more -- then serious deficit reduction," said Labor Secretary Robert B. Reich. "But this is not a political climate in which John Maynard Keynes would flourish."
Keynesian theory holds that in a weak economy, with idle workers, the government should spend to put them back to work and reduce unemployment, now reported at 7 percent of the labor force. But under such assumptions, the spending must be financed by raising the deficit; otherwise it would not serve as a stimulus. And for the moment, more deficit spending is not on the agenda.
Lower interest rates tend to encourage some extra spending by corporations. At some point, though, executives look for more orders before they expand their operations and hire workers. And whatever encouragement consumers draw from low rates, they often hesitate to buy if they do not see their incomes rising.