Expect 'Soft Landing' for Economy? Fasten Seat Belts, Japan Suggests


The U.S. economy, currently in its fifth year of recovery following the recession of 1990-1991, has recently shown signs of slowing.

Drops in housing sales and personal consumption, along with increases in inventories and initial unemployment claims, suggest that the upswing is over.

Despite this, many U.S. economists are predicting a "soft landing," in which, after some inventory adjustment, the U.S. economy resumes growth along the lines of 2.5 percent to 3 percent in 1996.

There is some defense for this view. After all, current economic stagnation is limited to interest rate-sensitive areas such as automobiles and housing, while other areas such as capital investment remain steady, exports seem likely to increase and the savings ratio is actually rising.

Despite this, an analysis of the U.S. economy from the standpoint of Japanese experience makes me doubt the outlook for a "soft landing."

I have several reasons for this pessimism.

First, the U.S. economy is already in recession by Japanese economic standards.

While U.S. economists judge the state of the economy by the level of economic activity, Japanese economists look at the trends of economic activity.

The business condition diffusion index in Japan marks these trends, and in many cases the economy peaks shortly after the BCDI.

In the United States, the National Association of Purchasing Management provides a similar indicator, and the NAPM indicator began its downward trend in late 1994-early 1995.

Experience in both Japan and the United States suggests that, left to its own devices, the economy will continue downward for roughly two years from that peak, with no "soft landing" in its future.

Second, while the weak dollar and other factors will increase exports, expanded imports will offset this.

The steep growth in capital investment and capital goods exports will also drive the growth of capital goods imports.

This concurrent rise in imports reduces the beneficial effect of growth in exports and investment on the expansion of the economy.

Third, there is little indication that the strong capital investment growth the United States has seen over the past two years can be maintained.

Historically, even so-called economy-independent investments, such as those for increased productivity or research and development, have been reduced as the economy has decelerated.

Finally, there is insufficient support for the theory that consumer spending will expand.

Though income growth and savings rates are both increasing, much of the income growth is due to rising interest income.

Considering the recent lowering of interest rates and the stagnant growth in employment and wages due to the decelerated economy, the current pace of income growth cannot be maintained.

In addition, the increasing loan obligations of consumers may well be too burdensome for them to increase spending.

Consumer installment credit balances have risen 10 percent to 15 percent since 1994 as compared with previous years, and Federal Reserve estimates suggest that 44 percent of the increase in consumption was financed by loans.

The ratio of liabilities (such as home mortgages, home equity loans and auto leases) to disposable income has passed its previous peak of 1989.

Payments on home mortgage interest and loan principals also count as savings, so some of the "savings" may actually go toward satisfying debt obligations.

The characteristics of economic cycles and the associated downside risks suggest that while the U.S. economy may not enter an actual recession by U.S. standards, it may well face a period of stagnation.

Any weakness in the U.S. economy could increase the instability of Mexico, which is relying on expanded exports to the United States to help it rebuild its own economy, and could have a similar effect on other emerging markets.

On the domestic front, the lower tax revenues that accompany a stalled economy would make it more difficult to reduce the budget deficit, placing President Clinton in a difficult position for the 1996 presidential election.

Rather than experiencing a soft landing, then, America could face economic difficulties that would cause confusion inside and outside U.S. borders.

Tetsuro Sugiura is senior economist and head of the New York office of Tokyo-based Fuji Research Institute Corp., a subsidiary of Fuji Bank.

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